2010 Q1FIRST QUARTER RESULTS
FINANCIAL & OPERATING HIGHLIGHTS
Three months ended March 31, 2010 2009 % Change
Financial ($000s, except where noted)
Oil and natural gas revenue 533,133 190,786 179
Funds flow from operations (1) 333,954 125,156 167
Per share – basic ($) 3.33 1.50 122
– diluted ($) 3.14 1.40 124
Net income (loss) 82,499 (1,542) -
Per share – basic ($) 0.82 (0.02) -
– diluted ($) 0.76 (0.02) -
Capital expenditures
PetroBakken 185,116 70,024 164
Petrominerales 116,209 81,560 42
Heavy Oil Business Unit (“HBU”) 23,934 21,410 12
Total Company 325,259 172,994 88
Total assets 6,494,359 2,414,146 169
Common shares, end of period (000s)
Basic 101,839 83,598 22
Diluted (2) 109,544 99,214 10
Operations
PetroBakken operating netback ($/boe except
where noted) (1) (3)
Oil and NGL revenue ($/bbl) (4) 76.08 48.57 57
Natural gas revenue ($/mcf) (4) 5.20 5.35 (3)
Oil and natural gas revenue (4) 70.41 46.81 50
Royalties 9.68 5.32 82
Production expenses 7.80 6.81 15
Operating netback (5) 52.93 34.68 53
Petrominerales operating netback ($/bbl) (1)
Oil revenue (4) 67.17 42.18 59
Royalties 7.39 4.60 61
Production expenses 6.71 7.40 (9)
Operating netback (5) 53.07 30.18 76
Average daily production
PetroBakken – oil and NGL (bbls) 37,654 19,722 91
PetroBakken – natural gas (mcf) 32,662 14,179 130
Total PetroBakken (boe) (3) 43,098 22,085 95
Petrominerales – oil (bbls) (6) 38,199 21,771 75
Total Company conventional (boe) (7) 81,297 43,856 85 (1)
Non-GAAP measure. See “Non-GAAP Measures” section within Management’s Discussion and Analysis (“MD&A”). (2)
Assumes 4.1 million common shares will be issued upon conversion of Petrobank’s convertible debentures. (3)
Six mcf of natural gas is equivalent to one barrel of oil equivalent (“boe”). (4)
Net of transportation expenses. (5)
Excludes hedging activities. (6)
Actual production sold for the first quarter of 2010 was 38,462 bopd (Q1 2009 – 21,409 bopd). (7)
HBU bitumen volumes are excluded from average daily production as Conklin and Kerrobert operations are considered
to be in the pre-operating stage and accordingly are capitalized.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 2
Petrobank’s results include the financial and operating results of PetroBakken Energy Ltd.
(“PetroBakken”) (TSX:PBN), 62% owned by Petrobank as at March 31, 2010 (58% as at May 13, 2010),
and Petrominerales Ltd. (“Petrominerales”) (TSX:PMG), 66% owned by Petrobank. PetroBakken
announced first quarter financial and operating results on May 11, 2010. Petrominerales announced first
quarter financial and operating results on May 5, 2010.
All references to $ are Canadian dollars unless otherwise noted. All comparisons are to the prior period,
unless otherwise noted.
Q1 2010 HIGHLIGHTS AND SIGNIFICANT TRANSACTIONS
� Petrobank’s consolidated production increased 85 percent to 81,297 barrels of oil equivalent per
day (“boepd”) in the first quarter of 2010 compared to 43,856 boepd in the first quarter of 2009 due
to production increases in PetroBakken and Petrominerales.
� Funds flow from operations increased 167 percent to $334.0 million in the first quarter of 2010. On
a per diluted share basis, funds flow from operations increased 124 percent to $3.14.
� Net income increased to $82.5 million in the first quarter of 2010 compared to a $1.5 million loss in
2009. On a per diluted share basis, net income increased to $0.76 from a loss of $0.02.
Petrobank’s Heavy Oil Business Unit (“HBU”)
� Petrobank incurred $23.9 million of capital expenditures in the first quarter related to our Kerrobert
heavy oil project, the Conklin oil sands project, a Conklin 4D seismic program, and 3D seismic
program and 12 stratigraphic wells over our May River leases.
PetroBakken
� First quarter production increased 95 percent to 43,098 boepd compared to 22,085 boepd in the
first quarter of 2009, primarily driven by the acquisition of TriStar Oil and Gas Ltd. (“TriStar”) on
October 1, 2009 and drilling activities in the Bakken.
� Operating netbacks (excluding hedging gains) averaged $52.93 per boe in the first quarter of 2010,
an increase of 53 percent compared to the first quarter of 2009, primarily due to higher benchmark
oil prices.
� PetroBakken drilled 73 (59.5 net) wells in the quarter; including 50 (41.1 net) in the Bakken, and
19 (16.3 net) in conventional plays in southeast Saskatchewan.
� On January 25, 2010, PetroBakken issued US$750 million of convertible debentures. The debentures
are convertible into common shares of PetroBakken at a conversion price of US$39.61 per share,
have an annual coupon rate of 3.125% and mature in February 2016.
� PetroBakken completed three non-core dispositions and two Cardium focused acquisitions in the
quarter – Berens Energy Ltd. and Rondo Petroleum Inc.
Petrominerales
� First quarter production increased 75 percent to 38,199 barrels of oil per day (“bopd”) compared to
21,771 bopd in the first quarter of 2009, primarily due to drilling successes at Guatiquia and Neiva.
� Operating netbacks averaged US$51.05 per barrel, an increase of 111 percent compared to the first
quarter of 2009, primarily due to higher benchmark oil prices.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 3
� Petrominerales added two more producing wells at Candelilla. The three Candelilla wells contributed
20,972 bopd to first quarter production.
� Petrominerales drilled a new oil discovery on the Casimena Block in Colombia, Yenac-1.
SUBSEQUENT EVENTS
� On April 23, 2010, the remaining US$149.3 million principal amount of Petrobank's 5.125%
convertible debentures were early converted. An aggregate of US$27.4 million was paid and
3,920,446 common shares were issued. On May 10, 2010, the remaining US$5.1 million principal
amount of Petrobank's 3% convertible debentures were early converted into 179,009 common
shares. As a result of these two events, there are no longer any Petrobank convertible debentures
outstanding.
PetroBakken
� On April 1, 2010, PetroBakken acquired all of the issued and outstanding shares of Result Energy Inc.
(“Result”) for cash consideration of $200 million and the issuance of 11.2 million PetroBakken
common shares. Result had working capital of approximately $60 million on closing of the
arrangement.
Petrominerales
� On April 14, 2010, Petrominerales acquired all of the issued and outstanding shares of PanAndean
Resources plc for US$30.4 million. The assets acquired pursuant to the acquisition include 6.9 million
gross (3.9 million net) acres from four exploration blocks in Peru and one exploration block in
Colombia.
HEAVY OIL BUSINESS UNIT OPERATIONAL UPDATE
During the first quarter, Petrobank’s Heavy Oil Business Unit continued to actively engage in field-
demonstrating our patented THAITM heavy oil recovery process on multiple projects within our 75 net
sections of oil sands leases in Alberta and 36 sections of oil sands licenses in Saskatchewan. THAITM is an
in-situ combustion technology for the recovery of bitumen and heavy oil that integrates existing proven
technologies and provides the opportunity to create a step change in the development of heavy oil
resources globally.
HIGHLIGHTS
� Kerrobert pump reconfiguration completed and on stream.
� Second phase of compression installed at Kerrobert.
� Reconfiguration of Conklin wells initiated.
� Conklin 4D seismic program completed.
� 3D seismic program completed and 12 additional stratigraphic wells drilled at May River.
� Received the second round of supplemental information requests (“SIRs”) from the Energy
Resources and Conservation Board (“ERCB”) on May 13, 2010.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 4
Kerrobert Project
Operations to reconfigure the pumps on the Kerrobert wells were initiated late in the first quarter. The
wells were shut in mid-March for the removal of the original hydraulic pumps and to install new
permanent progressive cavity pumps (PCPs) which will be incorporated into future wells. Due to severe
early spring weather and late equipment deliveries we were not able to complete the pump installation
until the latter part of April and restarted the wells in early May. During the reconfiguration, air injection
was maintained at reduced rates.
Since restart, oil production has been as high as 250 bopd. Produced oil has been a combination of
THAI™ oil that is partially upgraded along with intermittent heavy emulsions. The variation in produced
oil quality is expected to decline over time as we move through the startup phase and more of the
production comes from the toe of the well increasing the proportion of THAI™ oil. With the heavier
emulsion the pumping rate is reduced requiring the injection of a minor amount of solvent to break the
emulsion to allow higher pumping rates. Thermocouple temperatures have stabilized with wellbore
temperature of up to 175 degrees Celsius. Produced gas composition from both wells indicates that we
have high temperature combustion.
In addition to the new PCP pump design at Kerrobert, a new wellhead configuration for improved
handling of produced gases and instrumentation for bottomhole temperature and pressure monitoring
has been installed. We also installed an additional 3 mmcf/day of air injection capacity bringing the total
air injection capacity to 6 mmcf/day. This additional air injection capacity will be available for the
current and future wells. Surface facilities at Kerrobert have been operating steadily with minimal
upsets or solids production.
Our expansion plans for Kerrobert are progressing and we target a late third quarter start up. This
project will include an additional ten wells and related surface processing equipment with a 7,200 bopd
total gross production target.
Conklin Project
At Conklin, we are pursuing two well completion upgrade designs on the production wells. The first
upgrade will involve the addition of a production gas lift string in each of the wells with bottomhole
pressure monitoring. The second modification will be with installation of artificial lift pumps and gas
handling capabilities similar to that of Kerrobert. This is a significant optimization step building on our
Kerrobert experience and is expected to improve and stabilize production to achieve our 1,500 bopd
target and will be the design used in future projects. The first phase of the well completion upgrades are
planned to occur over the second quarter. The PCPs are expected to be installed in the third quarter.
During April, we began preparation for the completion upgrades resulting in a 50 percent downtime and
production averaged 103 bopd. Peak well production rates have achieved up to 480 bopd. Through the
first week of May production averaged 200 bopd, based on field estimates, with two wells on
production. P3B production was shut in during the first week of May to enable the replacement of a
packer in the injection well. This procedure is now complete and we plan to recommence production
operations.
We have also completed the fourth 4D seismic survey over the project area. This survey will provide an
additional view of the combustion front’s development over time.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 5
May River Project
Engineering, procurement, and construction management on the project has been awarded for the
wellsites, pipelines, and for the central processing facility. We will initiate ordering long lead items
during the second quarter and with timely regulatory approval steam start-up could occur in mid-2012.
An additional 12 OSE stratigraphic wells and 3D seismic over the project area has been completed,
allowing us to further delineate the reservoir and to optimize well placements.
The regulatory application for May River’s first phase was filed with the ERCB and Alberta Environment
in December 2008. The first round of SIRs from Alberta Environment and the ERCB were responded to in
mid-December 2009. We have received and responded to the second round of SIRs from Alberta
Environment and they have given the project draft approval. We received the second round of SIRs from
the ERCB on May 13, 2010 and we expect to submit our responses by the end of May.
The May River design incorporates power generation utilizing low energy produced gas, sulphur
recovery, is CO2 capture ready, and will be a net water producer rather than a water user, making our
May River project a leading environmentally sustainable benchmark for oil sands and heavy oil
development. The project utilizes a modular approach that is designed to be installed and operated on
heavy oil projects world-wide.
Dawson Project
Dawson is a joint venture project located near Peace River, Alberta with a significant heavy oil resource
in the Bluesky formation. The regulatory application for this initial two well project was filed on April 2,
2009 contemplating a project of similar scope and scale to our Kerrobert project. We received Alberta
Environment’s conditional approval on June 26, 2009. The ERCB’s SIRs were received at the end of
November, 2009 and they are in the process of reviewing our responses.
Archon Technologies
Our wholly-owned subsidiary, Archon Technologies Ltd., has tested several innovative and step-change
technologies, direct oxidation for H2S recover and enriched oxygen injection on a lab scale which are
planned to be field tested in 2010. These could significantly improve THAI™ performance by improving
overall recovery and quality of produced heavy oil. Small scale field pilots for these technologies are
planned to be implemented at Conklin. We recently filed another new enhancement patent involving an
innovative well design bringing our portfolio of patents and patents pending to eight.
We continue to receive world-wide interest in our technology because of its superior economic and
environmental benefits. Our joint venture strategy is to demonstrate and commercialize THAI™ and
CAPRI™ in a wide range of large global resource opportunities.
THAITM has many potential benefits over SAGD including expected higher resource recovery (70%-80%
versus 30%-50% for SAGD), lower production and capital costs, minimal usage of natural gas and fresh
water, a partially upgraded crude oil product, reduced diluent requirements for transportation, and
lower greenhouse gas emissions. The THAITM process also has the potential to operate in lower pressure,
lower quality, thinner and deeper reservoirs than current steam-based recovery processes. The
continued field demonstration of THAITM will have an enormous impact on resource recovery and
estimates of reserve volumes.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 6
Petrobank has created an educational video to provide interested viewers the opportunity to see THAITM
in action, where we’ve been, and where we’re going. We encourage you to view this newly produced
video at:
www.petrobank.com/heavy-oil/thai-video.
ANNUAL AND SPECIAL MEETING
Petrobank’s annual and special meeting (the “Meeting”) will be held Wednesday, May 26, 2010 at
2:00 p.m. (Calgary time) in the Main Ballroom of The Metropolitan Centre, 333 Fourth Avenue SW,
Calgary, Alberta. The Meeting will be webcast live and available for replay at www.petrobank.com under
the “Investors” section. After the formal business of the Meeting and corporate presentation,
management of the Company will provide a question and answer period. For those participating by
webcast, you are invited to submit questions to Petrobank any time during this question
and answer session by typing your question into a box displayed on the webcast page and clicking on
the button “submit”. Petrobank’s management will endeavour to answer as many questions as possible
during the time frame allotted. Before and after the meeting in the main lobby, management and staff
of Petrobank, PetroBakken and Petrominerales will be presenting informational displays regarding
Company activities and cordially invite all guests to attend.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 7
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”) is dated May 13, 2010 and should be
read in conjunction with the unaudited consolidated financial statements and accompanying notes of
Petrobank Energy and Resources Ltd. (“Petrobank”, “we”, “our” or the “Company”) as at and for the
three months ended March 31, 2010, MD&A for the year ended December 31, 2009, and the audited
consolidated financial statements as at and for the year ended December 31, 2009. Additional
information for the Company, including the Annual Information Form (“AIF”), can be found on SEDAR at
www.sedar.com or at www.petrobank.com. All amounts are in Canadian dollars, unless otherwise stated
and all tabular amounts are in thousands of Canadian dollars, except share amounts or as otherwise
noted. The energy content of natural gas has been measured in gigajoules (“GJ”). Natural gas volumes
have been converted to barrels of oil equivalent (“boe”). Six thousand cubic feet (“mcf”) of natural gas is
equal to one barrel based on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead. Boes may be misleading,
especially if used in isolation.
FORWARD-LOOKING STATEMENTS
In addition to historical information, the MD&A contains forward-looking statements that are generally
identifiable as any statements that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events of performance (often, but not always, through the use of
words or phrases such as “will likely result,” “expected,” “is anticipated,” “believes,” “estimated,”
“intends,” “plans,” “projection” and “outlook”). These statements are not historical facts and may be
forward-looking and may involve estimates, assumptions and uncertainties which could cause actual
results or outcomes to differ materially from those expressed in such forward-looking statements. The
reader is cautioned that assumptions used in the preparation of such information, although considered
reasonable at the time of preparation, may prove to be incorrect. Actual results achieved during the
forecast period will vary from the information provided herein as a result of numerous known and
unknown risks and uncertainties and other factors. Such factors include, but are not limited to: general
economic, market and business conditions; fluctuations in oil and gas prices; the results of exploration
and development of drilling and related activities; costs and availability of services; fluctuation in foreign
currency exchange rates; the uncertainty of reserve estimates; changes in environmental and other
regulations; risks associated with oil and gas operations; the ability to economically test, develop and
utilize the Company’s patented technologies, the feasibility of the technologies; and other factors, many
of which are beyond the control of the Company. Accordingly, there is no representation by Petrobank
that actual results achieved during the forecast period will be the same in whole or in part as those
forecasts. Except to the extent required by law, Petrobank assumes no obligation to publicly update or
revise any forward-looking statements made in this MD&A or otherwise, whether as a result of new
information, future events or otherwise. All subsequent forward-looking statements, whether written or
oral, attributable to Petrobank or persons acting on the Company’s behalf, are qualified in their entirety
by these cautionary statements.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 8
NON-GAAP MEASURES
This report contains financial terms that are not considered measures under Canadian generally
accepted accounting principles (“GAAP”), such as funds flow from operations, funds flow per share,
EBITDA and operating netback. These measures are commonly utilized in the oil and gas industry and
are considered informative for management and shareholders. Specifically, funds flow from operations
and funds flow per share reflect cash generated from operating activities before changes in non-cash
working capital. Management considers funds flow from operations and funds flow per share important
as they help evaluate performance and demonstrate the Company’s ability to generate sufficient cash to
fund future growth opportunities and repay debt. EBITDA is defined as earnings before interest, taxes,
depreciation, amortization, non-controlling interests and non-cash items. Operating netback is
determined by dividing sales revenue less transportation, royalties and production expenses by sales
volumes. Profitability relative to commodity prices per unit of production is demonstrated by an
operating netback. Funds flow from operations, funds flow per share, EBITDA and operating netbacks
may not be comparable to those reported by other companies nor should they be viewed as an
alternative to cash flow from operations, net income or other measures of financial performance
calculated in accordance with GAAP.
PETROBANK’S BUSINESS UNITS
The Company is comprised of three business units: the Heavy Oil Business Unit (“HBU”), PetroBakken,
formerly referred to in previous years and quarters as the Canadian Business Unit (“CBU”), and
Petrominerales, formerly referred to in previous years and quarters as the Latin American Business Unit
(“LABU”).
The HBU is operating the Conklin oil sands project and Kerrobert heavy oil project using Petrobank’s
patented THAITM technology. The Conklin and Kerrobert projects are in the pre-operating stage and
accordingly all expenses, net of revenues, are capitalized. Therefore, it’s important to note that
throughout this MD&A, results relating to the HBU are not included in operational results such as
average daily production, revenue, royalties, production expenses, or depletion and depreciation
expense.
PetroBakken, 62% owned by Petrobank as at March 31, 2010, contains conventional oil and gas
operations throughout western Canada with a primary focus on light oil developments from the Bakken
formation in southeast Saskatchewan and in the Cardium play in Alberta. Petrobank results include
100% of PetroBakken’s results; the minority interest share, which Petrobank does not own, is recorded
as income applicable to non-controlling interests on the consolidated statements of operations and
retained earnings and as paid-in capital and non-controlling interests on the consolidated balance
sheets. Results for PetroBakken are reported on a continuity of interest basis and as such incorporate
Petrobank’s CBU operations for the periods prior to the formation of PetroBakken.
Petrominerales, 66% owned by Petrobank as at March 31, 2010, is focused on oil exploration and
production in the countries of Colombia and Peru. Petrobank results include 100% of Petrominerales’
results; the minority interest share, which Petrobank does not own, is recorded as income applicable to
non-controlling interests on the consolidated statements of operations and retained earnings and as
paid-in capital and non-controlling interests on the consolidated balance sheets.
COMPARATIVES
Comparisons presented in this MD&A are first quarter of 2010 compared to the first quarter of 2009,
unless otherwise noted.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 9
NET INCOME
Throughout this MD&A reference is made to net income, which represents “Net income attributable to
Petrobank shareholders” on the Company’s consolidated financial statements.
SIGNIFICANT TRANSACTIONS
PetroBakken
� On January 25, 2010, PetroBakken issued US$750 million of convertible debentures. The
debentures are convertible into common shares of PetroBakken at a conversion price of
US$39.61 per share, have an annual coupon rate of 3.125% and mature in February 2016.
� On February 25, 2010 PetroBakken acquired all the issued and outstanding shares of Berens
Energy Ltd. (“Berens”) for cash consideration of $252.8 million and the assumption of bank
indebtedness of $74.9 million for total consideration of $344.4 million. There was a working
capital deficiency of $16.6 million at the acquisition date. The acquisition was accounted for
using the purchase method.
� In February and early March PetroBakken closed three non-core asset divestitures representing
approximately 3,000 boepd (55% natural gas) of production for net proceeds of $106.0 million.
� On March 12, 2010 PetroBakken acquired all the issued and outstanding shares of Rondo
Petroleum Inc. (“Rondo”) for cash consideration of approximately $88.7 million, assumption of
bank indebtedness of approximately $16.0 million and the issuance of 5.5 million PetroBakken
common shares. There was a working capital deficiency of $22.2 million at the acquisition date.
The acquisition was accounted for using the purchase method.
SUBSEQUENT EVENTS
� On April 23, 2010, the remaining US$149.3 million principal amount of Petrobank's 5.125%
convertible debentures were early converted. An aggregate of US$27.4 million was paid and
3,920,446 common shares were issued. On May 10, 2010, the remaining US$5.1 million principal
amount of Petrobank's 3% convertible debentures were early converted into 179,009 common
shares. As a result of these two events, there are no longer any Petrobank convertible
debentures outstanding.
PetroBakken
� On April 1, 2010, PetroBakken acquired all of the issued and outstanding shares of Result Energy
Inc. (“Result”) for cash consideration of $200 million and the issuance of 11.2 million
PetroBakken common shares. Result had working capital of approximately $60 million on closing
of the arrangement.
Petrominerales
� On April 14, 2010, Petrominerales acquired all of the issued and outstanding shares of
PanAndean Resources plc for US$30.4 million. The assets acquired pursuant to the acquisition
include 6.9 million gross (3.9 million net) acres from four exploration blocks in Peru and one
exploration block in Colombia.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 10
FINANCIAL AND OPERATIONAL REVIEW
PetroBakken’s acquisition of TriStar on October 1, 2009 has significantly impacted financial and
operating results for 2010.
Average Daily Production Three months ended March 31,
2010 2009 Change
PetroBakken
Oil and NGL (bbls) 37,654 19,722 91%
Natural gas (mcf) 32,662 14,179 130%
Total PetroBakken (boe) 43,098 22,085 95%
Petrominerales – oil (bbls) (1) 38,199 21,771 75%
Total Company conventional (boe) 81,297 43,856 85%
(1) Represents crude oil produced in the period. Actual sales volumes may be different due to crude oil in transit
at the period end date. Sales volumes in the first quarter of 2010 were 38,462 bopd (2009 – 21,409 bopd).
Strong production from PetroBakken and Petrominerales in the first quarter of 2010 helped the
Company achieve record average daily production in the first quarter of 2010. HBU bitumen volumes are
excluded from average daily production as operations are considered to be in the pre-operating stage
and accordingly revenues are offset against capitalized costs as opposed to being recognized in net
income.
PetroBakken
The 2010 production additions came from drilling at PetroBakken’s light oil properties in southeast
Saskatchewan and the Berens and Rondo corporate acquisitions, offset by asset divestitures and shut-in
production at Monias in northeast BC. Drilling activity increased significantly in the first quarter of 2010
as compared to the same period in the prior year commensurate with the increase in oil prices. In the
first quarter of 2009 there were two drilling rigs operating in the Bakken as compared to 11 in 2010.
PetroBakken drilled 59.5 net wells in the first quarter compared to 18.0 net wells in the first quarter of
2009. The corporate acquisitions added approximately 4,500 boepd of production starting in late
February 2010. Non-core property dispositions (approximately 5,000 boepd of production) were
completed between December 2009 and early March 2010 and more than offset the acquired
production for the quarter on a total and average basis. In addition completion problems in the second
lateral of our Montney well at Monias also forced us to shut-in approximately 800 boepd of production
for most of the quarter. This production is not anticipated to be on-stream until later in the second
quarter.
The Result acquisition closed on April 1, 2010 which added approximately 1,100 boepd of production. At
the end of April 2010, PetroBakken disposed of an additional 700 boepd in Alberta for gross proceeds of
$18 million. Current production (post all acquisition and disposition activity) is approximately
41,500 boepd. Production is expected to be lower in the second quarter of 2010 due to lack of drilling
and completion activity as a result of spring break-up and then begin to increase significantly again as
field activity resumes late in the second quarter.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 11
Petrominerales
Production increased 75 percent to 38,199 bopd primarily due to drilling success at Guatiquia and Neiva,
offset by natural production declines at Corcel. On a quarter-over-quarter basis, 2010 first quarter
production increased 56 percent over the fourth quarter of 2009.
Guatiquia production relates to the new Candelilla discovery made at the end of 2009. The Candelilla-1
well was placed on production December 31, 2009, and the Candelilla-2 and 3 wells were placed on
production on February 15 and March 29, 2010, respectively. In Corcel, production decreased
35 percent as no additional wells have been drilled on the block since the A2 sidetrack was put on
production on September 28, 2009. In Neiva, production increased 133 percent to 2,620 bopd due to
the results of Petrominerales’ on-going development drilling program. Since March 31, 2009, 34 new
wells have been drilled at Neiva.
Average Benchmark and Realized Prices Three months ended March 31,
2010 2009 Change
WTI (US$/bbl) 78.71 43.08 83%
WTI ($/bbl) 81.95 53.69 53%
AECO natural gas ($/mcf) 4.95 4.92 1%
US$ per C$1 0.96 0.80 20%
PetroBakken – oil and NGL
Realized price per bbl ($/bbl) 76.84 49.93 54%
US$ discount as a % of WTI 6% 10% (40%)
PetroBakken – natural gas
Realized price per mcf ($/mcf)
5.20
5.38
(3%)
Petrominerales – light / medium oil
Realized price per bbl ($/bbl) 74.37 49.46 50%
US$ discount as a % of WTI 19% 8% 138%
PetroBakken
First quarter 2010 realized oil and NGL prices increased due to higher WTI prices partially offset by a
stronger Canadian dollar compared to the U.S. dollar.
Realized natural gas prices decreased slightly in the first quarter despite slightly higher AECO benchmark
prices. The premium decreased as the proportion of sales under a higher premium long-term gas
contract decreased as a percentage of overall gas sales.
Petrominerales
The majority of the Petrominerales’ production is priced in relation to the Colombian Vasconia crude oil
stream and the Caño Limon oil stream. Petrominerales’ 2010 average realized oil prices changed mainly
due to changes in the benchmark WTI price and the narrowing of the Vasconia crude discount compared
to WTI.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 12
Revenue
The change in revenue in the first quarter of 2010 compared to the first quarter of 2009 is primarily due
higher sales recorded by Petrominerales, increased sales with PetroBakken’s acquisition of TriStar and
increased drilling activity, combined with higher oil prices, as summarized below:
Reconciliation of Changes in Revenue PetroBakken Petrominerales Total
Three months ended March 31, 2009 95,486 95,300 190,786
Sales volume variance 134,424 114,141 248,565
Price variance 45,796 47,986 93,782
Three months ended March 31, 2010 275,706 257,427 533,133
$ change in revenue 180,220 162,127 342,347
% change in revenue 189% 170% 179%
Net Realized Prices Three months ended March 31,
2010 2009 Change
PetroBakken
Gross revenue 275,706 95,486 189%
Transportation expense 2,600 2,451 6%
PetroBakken revenue 273,106 93,035 194%
Gross revenue ($/boe) 71.08 48.04 48%
Transportation expense ($/boe) 0.67 1.23 (46%)
PetroBakken realized price ($/boe) 70.41 46.81 50%
Petrominerales
Gross revenue 257,427 95,300 170%
Transportation expense 24,925 14,018 78%
Net revenue 232,502 81,282 186%
Gross revenue ($/bbl) 74.37 49.46 50%
Transportation expense ($/bbl) 7.20 7.28 (1%)
Petrominerales realized price ($/bbl) 67.17 42.18 59%
PetroBakken
First quarter 2010 net realized prices improved due mainly to higher WTI prices. Transportation costs
decreased on a unit of production basis as an increased number of wells have been tied into
PetroBakken’s southeast Saskatchewan production facilities resulting in a significant reduction in
trucking costs.
Petrominerales
All Guatiquia, Corcel, and Mapache production is trucked to various offloading stations. Transportation
costs decreased on a per barrel basis due to trucking a significant portion of production volumes to the
Monterrey offloading station. Petrominerales completed construction of the Monterrey offloading
station during the first quarter of 2010. It is located 77 kilometres from Corcel and is the closest
offloading station to Corcel and Guatiquia production. Trucking costs for oil delivered to Monterrey are
less than US$3.00 per barrel.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 13
In addition, Petrominerales has entered into a contract to deliver a minimum of 10,000 bopd to an
offloading station at Cusiana. Initial deliveries to this station are expected to commence in the third
quarter of 2010.
The other amount relates to the cost of crude oil purchased and marketed on behalf of third parties.
Royalties Three months ended March 31,
2010 2009 Change
PetroBakken (1) 37,541 10,571 255%
Petrominerales 25,572 8,870 188%
Total royalties 63,113 19,441 225%
PetroBakken – $ per boe 9.68 5.32 82%
Petrominerales – $ per bbl 7.39 4.60 61%
PetroBakken – royalties as a % of realized price 14% 11% 27%
Petrominerales – royalties as a % of realized price 11% 11% -
(1) PetroBakken royalties include the Saskatchewan Resource Surcharge determined as a percentage of sales
from our Saskatchewan Crown lands.
PetroBakken
First quarter 2010 royalties increased due to production additions from the TriStar acquisition and
higher oil prices. Royalties as a percentage of revenue increased following the TriStar acquisition as a
higher proportion of production is subject to higher rate freehold royalties that do not receive a royalty
holiday. The first 37,740 barrels of production from horizontal wells drilled on Saskatchewan Crown land
receive a royalty holiday but incur Saskatchewan Resource Surcharge of 1.7 percent.
Petrominerales
Colombian government royalties are fixed at a rate of eight percent until the Company’s net production
per field exceeds 5,000 bopd and then increase by one percent for each incremental 10,000 bopd of
production per field. In addition, a high price royalty is applied under certain Colombian exploration
contracts when the cumulative production in an exploitation area within a block exceeds five million
barrels. The high price royalty rate is 30 percent of the difference between the realized oil price and a
threshold oil price set by the Colombian Hydrocarbon Agency (“ANH”). Colombian government royalties
are fixed at a rate of eight percent until the Company’s net production per field exceeds 5,000 bopd and
then increase by one percent for each incremental 10,000 bopd of production per field. In addition, a
high price royalty is applied under certain Colombian exploration contracts when the cumulative
production in an exploitation area within a block exceeds five million barrels. The high price royalty rate
is 30 percent of the difference between the realized oil price and a threshold oil price set by the
Colombian Hydrocarbon Agency (“ANH”).
Production from the Corcel Block is subject to an eight percent net profits interest (“NPI”). The NPI
account is a cumulative balance that includes the deduction of capital investments such that when
negative, no amount is payable.
In the first quarter of 2010, royalties increased 188 percent due to higher production combined with
higher crude oil prices, offset somewhat by an appreciation of the Canadian dollar. Royalties on a per
barrel basis increased 61 percent, consistent with a 59 percent increase in the realized oil sales price.
Royalties as a percentage of realized oil prices remained consistent at 11 percent.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 14
Gain on Risk Management Contracts Three months ended March 31,
2010 2009 Change
PetroBakken realized gain (loss) (1,019) 10,555 -
PetroBakken unrealized gain (loss) 2,451 (8,328) -
Gain on risk management contracts 1,432 2,227 (36%)
PetroBakken
PetroBakken enters into commodity price derivative contracts to limit exposure to declining commodity
prices protecting project economics and providing increased stability of cash flows and capital
expenditure programs. Commodity prices fluctuate due to political events, weather conditions,
disruptions in supply, and changes in demand. Risk management activities are conducted pursuant to
PetroBakken’s risk management policies approved by the Board of Directors.
The majority of PetroBakken’s financial derivative contracts are option based contracts and as such their
fair value at a particular point in time is affected by underlying commodity prices, expected commodity
price volatility and the duration of the contract. The fair value of fixed price derivative contracts at a
particular point in time is determined by the expected future settlements of the underlying commodity
or interest rate. At March 31, 2010, the fair value of financial derivative contracts was a liability of
$2.8 million. The fair value of this liability represents the estimated amount required to settle
PetroBakken’s outstanding contracts at March 31, 2010 and will be different than what will eventually
be realized.
The gain or loss on risk management contracts is made up of two components; the realized component
reflects actual settlements that occurred during the period, and the unrealized component represents
the change in the fair value of contracts during the period. In the first quarter of 2010 WTI prices
increased which has an overall positive impact on revenue, however the cost of certain puts caused a
small realized loss on derivative contracts in the quarter. Conversely fixed price gas contracts, some of
which were acquired with Berens, resulted in realized and unrealized gains in the quarter partially
offsetting the loss on oil contracts.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 15
At March 31, 2010, PetroBakken recorded an $8.4 million liability related to the following crude oil price
risk management contracts:
Term Volume (bopd) Price ($/bbl) Benchmark
Jan. 1, 2010 – Dec. 31, 2010 500 C$65.00 floor / C$87.25 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$65.00 floor / C$90.00 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$65.00 floor / C$99.50 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$70.00 floor / C$87.85 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$82.45 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$93.65 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$94.15 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 1,000 C$75.00 floor / C$98.30 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$100.00 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$93.05 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$93.25 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$94.75 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 put US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$75.00 put US$WTI
Feb. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$97.00 ceiling US$WTI
Feb. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$97.25 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 1,000 C$75.00 floor / C$90.00 ceiling C$ WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$93.75 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$99.00 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$80.00 floor / US$98.55 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$80.00 floor / US$98.60 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$104.00 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$104.25 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 C$80.00 floor / C$95.60 ceiling C$WTI
Jan. 1, 2011 – Dec. 31, 2011 1,000 C$80.00 floor / C$100.70 ceiling C$WTI
PetroBakken entered into the following crude oil price risk management contracts subsequent to
March 31, 2010:
Term Volume (bopd) Price ($/bbl) Benchmark
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$108.70 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$111.00 ceiling US$WTI
At March 31, 2010, PetroBakken recorded a $5.1 million asset related to the following natural gas price
risk management contracts:
Term Volume (GJ/d) Price ($/GJ) Benchmark
Nov. 1, 2009 – Oct. 31, 2010 1,500 C$5.00 floor / C$6.25 ceiling AECO
Nov. 1, 2009 – Nov. 30, 2010 2,500 C$5.00 floor / C$7.20 ceiling AECO
Apr. 1, 2010 – Mar. 31, 2011 2,000 C$6.00 fixed price swap AECO
Apr. 1, 2010 – Dec. 31, 2011 2,000 C$6.02 fixed price swap AECO
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 16
PetroBakken acquired the following natural gas price risk management contract from Result on
April 1, 2010:
Term Volume (GJ/d) Price ($/GJ) Benchmark
Nov. 1, 2009 – Oct. 31, 2010 1,200 C$ 5.36 fixed price swap AECO
At March 31, 2010, PetroBakken recorded a $0.5 million asset related to the following interest rate swap
contracts:
Term Notional Principal / Month Fixed Annual Rate (%)
Apr. 2009 – Apr. 2011 C$50 million 1.050%
Apr. 2009 – Apr. 2012 C$50 million 1.300%
Jan. 2009 – Jan. 2012 C$50 million 1.620%
Jan. 2009 – Jan. 2012 C$50 million 1.653%
Feb. 2009 – Feb. 2012 C$25 million 1.540%
Feb. 2009 – Feb. 2012 C$25 million 1.510%
Feb. 2009 – Feb. 2011 C$40 million 2.390%
Jun. 2009 – Jun. 2012 C$25 million 2.094%
Production Expenses Three months ended March 31,
2010 2009 Change
PetroBakken 30,242 13,536 123%
Petrominerales 23,234 14,260 63%
Total production expenses 53,476 27,796 92%
PetroBakken – $ per boe 7.80 6.81 15%
Petrominerales – $ per bbl 6.71 7.40 (9%)
PetroBakken
Production expenses increased in the first quarter of 2010 primarily as a result of a 95 percent increase
in production from the TriStar acquisition. Production expenses per boe increased in the first quarter
due to higher cost production acquired from TriStar partially offset by cost efficiencies gained during the
quarter due to the completion of two production facilities in southeast Saskatchewan. These facilities
have also allowed PetroBakken to add liquids rich natural gas production and reserves associated with
Bakken light oil production. Operating costs in our core area of southeast Saskatchewan averaged
$6.37 per boe in the first quarter.
Petrominerales
In the first quarter of 2010, production expenses in Canadian dollars increased 63 percent primarily due
to 75 percent higher production levels. In U.S. dollars, production expenses on a per barrel basis
increased by nine percent primarily due to larger facilities resulting in higher fixed costs, and costs
associated with handling higher fluid production. Due to an appreciation of the Canadian dollar relative
to the U.S. dollar, per barrel production expenses in Canadian dollars actually decreased by nine percent
to $6.71 per barrel.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 17
General and Administrative Expenses Three months ended March 31,
2010 2009 Change
HBU and Corporate 1,643 940 75%
PetroBakken 7,518 3,000 151%
Petrominerales 5,240 3,419 53%
Total general and administrative expenses 14,401 7,359 96%
PetroBakken – $ per boe 1.94 1.51 28%
Petrominerales – $ per bbl 1.51 1.77 (15%)
Total general and administrative costs increased in the first quarter of 2010 primarily to additional
personnel and office costs as a result of expanding operations in all business units, and specifically staff
added through PetroBakken’s acquisition of TriStar. On a unit of production basis, PetroBakken’s costs
increased while Petrominerales costs decreased due to higher production levels.
Stock-Based Compensation Expenses Three months ended March 31,
2010 2009 Change
HBU and Corporate 3,251 1,489 118%
PetroBakken 5,236 4,765 10%
Petrominerales 2,622 1,422 84%
Total stock-based compensation expenses 11,109 7,676 45%
Stock-based compensation expenses relate to stock options and deferred common shares granted by
Petrobank, PetroBakken and Petrominerales and incentive shares granted by PetroBakken and
Petrominerales. The calculation of this non-cash expense is based on the fair value of stock options,
deferred common shares and incentive shares granted, amortized over the vesting period of the option
or incentive shares, or immediately upon grant of the deferred common shares.
Starting in the fourth quarter of 2009 the PetroBakken expense relates to PetroBakken securities
granted to employees, officers and directors following the incorporation of PetroBakken and the
acquisition of TriStar. For the first nine months of 2009, this expense relates to historical Petrobank
securities that were granted to employees involved with CBU operations, and as such has been excluded
from HBU and Corporate expense.
Interest Expense Three months ended March 31,
2010 2009 Change
HBU and Corporate 1,586 3,193 (50%)
PetroBakken 14,902 3,016 394%
Petrominerales 3,591 2,960 21%
Total interest expense 20,079 9,169 119%
Interest expense includes interest on bank debt and convertible debentures, fees on letters of credit,
and amortization of deferred financing costs. Interest expense includes non-cash accretion related to
the convertible debentures of $7.3 million in the first quarter of 2010 (2009 – $4.8 million).
HBU and Corporate
Following the early conversion of Petrobank’s remaining convertible debentures into common shares in
the second quarter; interest expense will be reduced to only interest on bank debt, if any, and
amortization of deferred financing costs.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 18
PetroBakken
Interest expense increased in the first quarter of 2010 primarily as a result of interest expense and
accretion on the convertible debentures that were issued on January 25, 2010. Bank debt was repaid at
the end of January 2010 when the PetroBakken convertible debentures were issued, and increased later
in the quarter to fund the Berens and Rondo acquisitions.
Petrominerales
Interest expense was higher in the first quarter of 2010 mainly due to higher standby fees associated
with Petrominerales’ expanded US$150 million secured bank facility that closed on December 30, 2009.
Foreign Exchange Loss (Gain) Three months ended March 31,
2010 2009 Change
HBU and Corporate (9,440) 6,994 -
PetroBakken (7,271) - -
Petrominerales 4,472 (3,510) -
Total foreign exchange loss (gain) (12,239) 3,484 -
HBU and Corporate
The Company recognized foreign exchange gains in the first quarter of 2010 primarily due to the
appreciation of the Canadian dollar relative to the U.S. dollar. An unrealized foreign exchange gain of
$8.3 million (2009 – loss of $7.3 million) in the first quarter was mainly attributable to Petrobank’s U.S.
dollar denominated convertible debentures.
PetroBakken
As PetroBakken’s convertible debentures are denominated in U.S. dollars, the vast majority of
unrealized foreign exchange gains and losses typically relate to the change in the foreign exchange rate
compared to the rate at the end of the previous period, except in the first quarter when it was the rate
on January 25, 2010 when the debentures were issued. A stronger Canadian dollar at March 31, 2010
resulted in a foreign exchange gain for the quarter.
Petrominerales
The appreciation of the Colombian peso relative to the U.S. dollar in the first quarter of 2010 resulted in
a $4.5 million foreign exchange loss in Canadian dollars in the first quarter of 2010. The Colombian peso
to U.S. dollar exchange rate decreased six percent in the first quarter, from 2,044 at January 1, 2010 to
1,929 at March 31, 2010. Changes in this exchange rate impact the Company’s U.S. dollar denominated
expenses and expenditures as approximately 60 percent of the Company’s expenditures are incurred in
Colombian pesos.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 19
Depletion, Depreciation and Accretion (“DD&A”) Expense Three months ended March 31,
2010 2009 Change
HBU and Corporate 193 84 130%
PetroBakken 133,925 58,810 128%
Petrominerales 61,050 49,851 22%
Total DD&A expense 195,168 108,745 79%
PetroBakken – $ per boe 34.53 29.59 17%
Petrominerales – $ per bbl 17.64 25.87 (32%)
PetroBakken
DD&A increased on both an absolute and unit of production basis in the first quarter of 2010 due
primarily to the TriStar acquisition.
Petrominerales
DD&A expense in the first quarter of 2010 increased 22 percent over 2009 due primarily to a 75 percent
production increase offset by a lower per barrel depletion rate and an appreciation of the Canadian dollar
relative to the U.S. dollar. The depletion rate per barrel decreased by 32 percent, mainly due to a
43 percent increase in gross total proved reserves to 36.0 million barrels combined with an appreciation of
the Canadian dollar relative to the U.S. dollar.
Current Taxes Three months ended March 31,
2010 2009 Change
Petrominerales current taxes 29,722 1,477 1,912%
Current taxes consist of income and equity taxes in Colombia. Equity tax is based on equity capitalization
levels in Colombia. Petrominerales’ pre-tax income is subject to the Colombian statutory income tax rate
of 33%.
Future Income Taxes Three months ended March 31,
2010 2009 Change
HBU and Corporate (4,162) (3,067) 36%
PetroBakken 13,276 1,385 859%
Petrominerales (Colombia) (262) (7,671) (97%)
Total future income taxes (recovery) 8,852 (9,353) -
HBU and Corporate
The future income tax recovery in the first quarter is consistent with income earned after adjustments
for non-deductible and non-taxable items.
PetroBakken
PetroBakken’s future income tax expense for the first quarter is consistent with income earned after
adjustments for non-deductible items.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 20
Petrominerales
When combined with the current tax expense in Colombia, Petrominerales had a U.S. dollar
denominated effective tax rate of 28% in the first quarter of 2010. The effective tax rates are lower than
the Colombian statutory income tax rate of 33% largely as a result of enhanced tax deductions for the
acquisition of certain capital assets.
Net Income Attributable to Non-Controlling Interests (“NCI”) Three months ended March 31,
2010 2009 Change
PetroBakken 14,535 - -
Petrominerales 26,313 2,421 987%
Net income attributable to NCI 40,848 2,421 1,587%
The net income attributable to NCI represents the non-controlling interest share of PetroBakken and
Petrominerales’ net income. The NCI share in PetroBakken averaged approximately 37 percent in the
first quarter of 2010 (2009 – nil). The NCI share in Petrominerales averaged approximately 34 percent in
the first quarter of 2010 (2009 – 23 percent).
Net Income (Loss)
The change in net income in the first quarter of 2010 is primarily due to higher sales volumes, higher
commodity prices and foreign exchange gains, partially offset by higher DD&A expense, royalties,
production, transportation, general and administrative, stock-based compensation and interest
expenses, higher current and future income taxes and higher non-controlling interests as summarized in
the table below.
Reconciliation of Changes in Net Income (Loss) Three months ended March 31,
($000s) Per share (1)
Net income (loss): March 31, 2009 (1,542) (0.02)
Increase (decrease) due to:
Sales volumes 248,565 2.33
Realized prices 93,782 0.88
Royalties (43,672) (0.41)
Production expenses (25,680) (0.24)
Transportation expenses (11,056) (0.10)
General and administrative expenses (7,042) (0.07)
Stock-based compensation expenses (3,433) (0.03)
Interest expenses (10,910) (0.10)
Foreign exchange 15,723 0.14
DD&A expense (86,423) (0.81)
Current taxes (28,245) (0.27)
Future income taxes (18,205) (0.17)
Non-controlling interests (38,427) (0.36)
Other (2) (935) (0.01)
Net income: March 31, 2010 82,499 0.76
(1) Per weighted average number of diluted common shares for the period ending March 31, 2010.
(2) Includes gain on risk management contracts, interest income and acquisition costs.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 21
Funds Flow From Operations
The increase in funds flow from operations in the first quarter of 2010 is primarily due to higher sales
volumes and higher commodity prices, partially offset by higher royalties, realized hedging losses, higher
production, transportation, general and administrative and cash interest expenses, as well as higher
current taxes.
Reconciliation of Changes in Funds Flow From Operations Three months ended March 31,
($000s) Per share (1)
Funds flow from operations: March 31, 2009 125,156 1.18
Increase (decrease) due to:
Sales volumes 248,565 2.33
Realized prices 93,782 0.88
Royalties (43,672) (0.41)
Realized portion of risk management contracts (11,574) (0.11)
Production expenses (25,680) (0.24)
Transportation expenses (11,056) (0.10)
General and administrative expenses (7,042) (0.07)
Cash interest expense (6,730) (0.06)
Realized foreign exchange losses 711 0.01
Current taxes (28,245) (0.27)
Other (2) (261) -
Funds flow from operations: March 31, 2010 333,954 3.14
(1) Per weighted average number of diluted common shares for the period ending March 31, 2010.
(2) Includes interest income, acquisition costs and asset retirement obligations settled.
The following table shows the reconciliation of funds flow from operations to cash flow from operating
activities for the periods noted:
Three months ended March 31,
2010 2009 Change
Funds flow from operations: Non-GAAP 333,954 125,156 167%
Changes in non-cash working capital (116,286) (13,892) 737%
Cash flow from operating activities: GAAP 217,668 111,264 96%
Capital Expenditures Three months ended March 31,
2010 2009 Change
HBU and Corporate 23,934 21,410 12%
PetroBakken (“PBN”) 185,116 70,024 164%
Petrominerales (“PMG”) 116,209 81,560 42%
Total capital expenditures 325,259 172,994 88%
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 22
Q1 2010 Capital Expenditures By Type HBU and Corporate PBN PMG Total
Drilling and completions 5,027 132,424 55,251 192,702
Facilities 2,938 5,160 40,085 48,183
Land - 35,288 - 35,288
Seismic 3,839 4,391 17,395 25,625
Capitalized operations in pre-operating phase 8,668 - - 8,668
Asset acquisition - 3,463 - 3,463
Other (1) 3,462 4,390 3,478 11,330
Total capital expenditures 23,934 185,116 116,209 325,259
(1) Includes health, safety and environmental, capitalized salaries and office furniture and fixtures. HBU also
includes $2.2 million of capitalized cash interest.
HBU and Corporate
HBU expenditures in the first quarter of 2010 included facility, ongoing start-up costs and operating
expenses at Kerrobert, workovers and operating expenses at Conklin, drilling oil sands exploration wells
and obtaining 3D seismic to further define the resource for the May River Project, and capitalized
interest. Currently, the business unit operations are considered to be in the pre-operating stage and as a
result, operating expenses net of revenues and interest are capitalized. Capitalized operations in pre-
operating phase also include well workovers related to our Conklin Project.
PetroBakken
Expenditures in the first quarter 2010 were focused on drilling, completions and recompletions,
primarily at our southeast Saskatchewan light oil properties, where we drilled 41.1 net Bakken wells and
16.3 net conventional wells. In addition, 1.0 net well was drilled in northeast BC and 1.1 net wells were
drilled in Alberta on property acquired from Berens. The majority of facilities expenditures in the first
quarter included costs to tie-in additional wells and the expansion of gathering systems to our five major
facilities in southeast Saskatchewan. Land expenditures were primarily related to Cardium crown land
acquisitions.
Petrominerales
First quarter capital expenditures at Guatiquia included drilling and completing the Candelilla-2 and 3
exploration wells and facilities costs for the installation of flow lines and early production facilities.
Corcel expenditures included facilities costs at the Corcel central processing facility to increase fluid
handling capacity, completion costs for the F1 water injector well, costs related to the 2010 3D seismic
acquisition program and civil construction costs related to the 2010 drilling program. Neiva expenditures
included drilling and completing six oil wells and performing five well optimizations. Exploration activity
included civil construction costs associated with 2010 Central Llanos exploration program and initial
drilling costs associated with the Yenac-1 well on the Casimena Block. Mapache expenditures related
mainly to civil construction for the 2010 ten-well exploration drilling program. Heavy oil block
expenditures related to drilling, completion and testing of the Rio Ariari-2 well. Activities in Peru
included the remaining acquisition of 150 square kilometres of 3D seismic on Block 126. Orito
expenditures related primarily to a water flood pilot project.
Goodwill
As a result of the Berens and Rondo acquisitions, goodwill increased by $252.9 million in the first
quarter. Goodwill as at March 31, 2010 was $1,313.9 million.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 23
SUMMARY OF QUARTERLY RESULTS 2010 2009 2008
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Financial ($000s except where noted)
Oil and natural gas revenue 533,133 446,021 232,471 224,396 190,786 206,161 317,137 247,479
Funds flow from operations 333,954 279,004 142,927 150,350 125,156 147,813 216,709 177,923
Per share – basic ($) 3.33 2.99 1.55 1.78 1.50 1.78 2.62 2.16
– diluted ($) 3.14 2.65 1.42 1.64 1.40 1.63 2.36 1.92
Net income (loss) 82,499 57,108 54,846 34,667 (1,542) 28,083 123,226 57,636
Per share – basic ($) 0.82 0.61 0.59 0.41 (0.02) 0.34 1.49 0.70
– diluted ($) 0.76 0.56 0.56 0.40 (0.02) 0.34 1.35 0.64
EBITDA 356,058 295,515 153,133 155,058 130,884 138,529 235,377 182,349
Capital expenditures 325,259 279,398 194,043 144,422 172,994 279,982 257,305 172,356
Operations
PetroBakken operating netbacks by
product
Crude oil and NGL sales price, net of
transportation ($/bbl) 76.08 71.63 67.65 62.22 48.57 57.71 115.11 117.64
Royalties 10.56 11.26 10.75 7.97 5.39 8.90 13.36 11.83
Production expenses 7.95 8.45 7.05 6.66 6.98 8.68 9.56 9.55
Operating netback 57.57 51.92 49.85 47.59 36.20 40.13 92.19 96.26
Natural gas sales price, net of
transportation ($/mcf) 5.20 4.61 3.55 3.91 5.35 6.86 7.94 9.83
Royalties 0.60 0.63 0.54 0.67 0.78 1.06 1.38 1.81
Production expenses 1.12 1.16 0.93 0.95 0.90 0.77 0.66 0.83
Operating netback 3.48 2.82 2.08 2.29 3.67 5.03 5.90 7.19
Oil equivalent sales price, net of
transportation ($/boe) 70.41 65.05 60.66 56.64 46.81 55.90 106.51 109.43
Royalties 9.68 10.14 9.62 7.40 5.32 8.62 12.72 11.70
Production expenses 7.80 8.23 6.83 6.52 6.81 8.24 8.84 8.88
Operating netback 52.93 46.68 44.21 42.72 34.68 39.04 84.95 88.85
Petrominerales operating netback
($/bbl)
Crude oil sales price, net of
transportation 67.17 65.23 61.96 55.76 42.18 54.93 110.53 115.77
Royalties 7.39 7.14 6.06 5.02 4.60 4.68 11.71 11.11
Production expenses 6.71 8.05 8.81 7.86 7.40 7.80 8.38 10.86
Operating netback 53.07 50.04 47.09 42.88 30.18 42.45 90.44 93.80
Average daily production
PetroBakken – crude oil and NGL
(bbls) 37,654 38,796 15,185 16,761 19,722 19,841 16,024 14,205
PetroBakken – natural gas (mcf) 32,662 40,951 16,177 16,906 14,179 14,598 14,047 13,871
Total PetroBakken conventional (boe) 43,098 45,621 17,881 19,579 22,085 22,274 18,365 16,517
Petrominerales – crude oil (bbls) 38,199 24,555 21,546 21,548 21,771 15,344 12,485 7,339
Total Company conventional (boe) 81,297 70,176 39,427 41,127 43,856 37,618 30,850 23,856
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 24
Significant factors influencing quarterly results were:
� Strong production in both PetroBakken and Petrominerales and high benchmark oil prices in the
second and third quarters of 2008 resulted in dramatic increases in operating netbacks, revenue
and funds flow from operations. In the fourth quarter of 2008 and first quarter of 2009
benchmark crude oil prices declined significantly, which negatively affected profitability, despite
higher production levels. Crude oil benchmark prices began to recover throughout 2009
(although not to the level experienced in the second and third quarters of 2008) contributing to
improved netbacks, revenue and funds flow from operations.
� PetroBakken light oil production in the fourth quarter of 2009 and the first quarter of 2010
increased significantly over prior quarters mainly due to the acquisition of TriStar on
October 1, 2009.
� PetroBakken production decreased in the first quarter of 2010 compared to the fourth quarter
of 2009 due to non-core property dispositions that occurred between December 2009 and early
March 2010 and restricted production at Monias in northeast BC, partially offset by the Berens
and Rondo acquisitions completed in the last half of the quarter.
� PetroBakken capital expenditures decreased significantly in the first and second quarter of 2009
in response to lower crude oil prices which resulted in production declines in the second and
third quarter of 2009. For the remainder of 2009 and the first quarter of 2010 expenditures
increased as we expanded our drilling program considerably.
� Petrominerales production increased in the third quarter of 2008 due to production additions
from the Corcel-A4 and C1 wells.
� Petrominerales production increased again in the fourth quarter of 2008 due to production
additions from the Corcel-C3 and D1 wells, offset by a temporary suspension of operations at
the Orito field due to a general strike in the region.
� First quarter 2009 Petrominerales production increased further due to additions from Corcel-D2,
two wells on the Mapache block and six wells at Neiva.
� Fourth quarter 2009 Petrominerales production increased mainly due to the Corcel-A2 side-
track well.
� First quarter 2010 Petrominerales production increased mainly due to three Candelilla wells
drilled on Petrominerales’ Guatiquia Block.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 25
Commitments
The following is a summary of the estimated costs required to fulfill the Company's remaining contractual
commitments as at March 31, 2010:
Type of Obligation < 1 Year 1-3 Years 3-5 Years Thereafter Total
HBU and Corporate
Office operating leases ($) 1,800 4,300 5,100 10,900 22,100
PetroBakken
Office operating leases ($) 4,704 9,058 11,126 19,345 44,233
Petrominerales
Exploration contracts (US$) (1)
33,900 27,200 - - 61,100
Transportation contract (US$) (2)
8,054 35,685 11,895 - 55,634
Office lease (US$) 1,800 3,800 3,800 - 9,400
Total Company (3)
50,941 81,083 32,166 30,245 194,435
(1) These work commitments are normal course of business exploration activities that include property costs,
acquisition and processing of seismic data and drilling exploration wells. Petrominerales has issued letters of
credit totalling US$18.0 million and pledged US$1.4 million in restricted cash to guarantee the obligations
under these exploration contracts. (2)
Petrominerales entered into a take-or-pay transportation contract to deliver up to 10,000 barrels of oil per day
in the Llanos Basin of Colombia. (3)
US$ amounts have been converted using the March 31, 2010 exchange rate of $1.0156.
Liquidity and Capital Resources
Petrobank, PetroBakken and Petrominerales manage their capital structure independently and generate
their own cash flows, and have the ability to fund their operations through the issuance of secured and
unsecured debt as well as equity financing. The table below outlines the composition of Petrobank’s
consolidated capital structure and liquidity:
HBU and Corporate
PetroBakken
Petrominerales Consolidated
Petrobank
Net working capital deficit
(surplus) – excluding
convertible debentures $ (28,438) $ 222,845 $ (45,127) $ 149,280
Bank debt – principal $ - $ 342,800 $ - $ 342,800
Convertible debentures –
principal amount (US$) $ 154,400(1) $ 750,000 $ 81,700 $ 986,100
Common share capital (2) $1,193,510 $ 2,867,364 US$ 200,104 $1,193,510
Credit facility –
borrowing base $ 30,000(3) $ 900,000 US$ 150,000
Available credit capacity $ 30,000(3) $ 557,200 US$ 150,000
(1) In April and May 2010, all of the remaining Petrobank convertible debentures were converted into a total of
4,099,455 common shares. As a result, the outstanding principal amount of Petrobank convertible debentures
has been reduced to nil. (2)
The common share capital of PetroBakken and Petrominerales eliminates upon consolidation of the financial
statements. (3)
Petrobank closed the $30 million credit facility effective April 14, 2010.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 26
HBU and Corporate
Petrobank manages its capital structure and makes adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets. Petrobank considers its capital structure
to include common share capital, convertible debentures, bank debt and working capital. In order to
maintain or adjust the capital structure, from time to time Petrobank may issue common shares or other
securities, obtain project financing, sell assets or adjust its capital spending to manage current and
projected debt levels. Based on Petrobank’s current ownership and PetroBakken’s intentions of paying
an annual dividend of $0.96 per PetroBakken share, Petrobank expects to receive $105 million of
dividends annually from PetroBakken paid monthly. Petrobank can also raise funds by selling a portion
of its ownership in PetroBakken and Petrominerales or by issuing additional debt secured by these
interests.
At March 31, 2010, HBU and corporate had no bank debt and current assets in excess of accounts
payable and accrued liabilities of $28.4 million.
Petrobank’s HBU and Corporate operating segment closed a $30 million secured credit facility on
April 14, 2010. The reserve-based revolving credit facility has an initial term ending April 30, 2011,
extendable by the lender for an additional year. If the lender were to not extend the term, the drawn
amount would become due on April 30, 2012. The credit facility bears interest at the prime rate plus a
margin based upon the collateral value of Petrobank’s ownership in its public subsidiaries. The facility is
secured by a $100 million demand debenture and a securities pledge in respect of the issued and
outstanding shares of Petrobank’s publicly traded subsidiaries. While drawn, the HBU and Corporate
operating segment must maintain a coverage ratio of not less than 2:1.
Petrobank is in compliance with the covenants in its convertible debenture agreements. Petrobank’s
convertible debenture agreements stipulate that we maintain a ratio of equity to total assets of at least
30% and to limit the amount of security and encumbrances to 27.5% of total assets.
Petrobank expects to satisfy ongoing working capital requirements with cash, available credit, and
dividends received from PetroBakken.
PetroBakken – 62% owned by Petrobank as at March 31, 2010
PetroBakken’s strategy is to provide a reasonable dividend yield to shareholders while delivering an
accretive growth-oriented business plan. PetroBakken is focused on securing appropriate levels of
capitalization to support this business strategy.
As at March 31, 2010, PetroBakken had $342.8 million of bank debt on its $900 million credit facility.
The credit facility is with a syndicate of banks and is subject to a semi-annual review. This review is
currently underway and is expected to be completed in the second quarter of 2010. The facility is a
borrowing base facility that is determined based on, among other things, reserves, results of operations,
current and forecasted commodity prices and the current economic environment. The credit facility
provides that advances may be made by way of direct advances, banker’s acceptances, or standby
letters of credit/guarantees. Direct advances bear interest at the bank’s prime lending rate plus an
applicable margin for Canadian dollar advances, and at the bank’s U.S. base rate plus an applicable
margin for U.S. dollar advances. The applicable margin charged by the bank is based on a sliding scale
ratio of PetroBakken’s debt to earnings before interest, taxes, depletion, depreciation and amortization
(“EBITDA”). The facility is secured by a $2.0 billion demand debenture and a securities pledge on the
Company’s assets. PetroBakken is not subject to restrictive financial covenants under this credit facility.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 27
On January 25, 2010, PetroBakken issued convertible debentures with an annual coupon of 3.125% for
gross proceeds of US$750 million. The convertible debentures have financial covenants that limit the
amount of security and encumbrances PetroBakken has to 35% of total assets. Proceeds from the
issuance of the convertible debenture were used to repay all outstanding bank debt. In February 2010
PetroBakken made a $327.7 million cash payment, including repayment of bank debt, for the acquisition
of Berens. In March 2010 PetroBakken made a $104.7 million cash payment, including repayment of
bank debt, for the acquisition of Rondo, and in April 2010 PetroBakken made a net $140.0 million cash
payment for the acquisition of Result. PetroBakken closed gross $112.0 million of Alberta non-core
property dispositions in the first quarter of 2010 and also closed an additional property disposition on
April 30, 2010 for gross proceeds of $18.0 million.
In addition to the financial resources noted above, other possible sources of funds available to
PetroBakken include the following:
� Funds flow from operations;
� Increases under PetroBakken’s existing credit facility;
� Issuance of common shares of PetroBakken;
� Issuance of subordinated or convertible debt;
� Sale of producing or non-producing assets. Cash generated from a sale may be reduced by any
required debt payments; and,
� Monetization of risk management assets.
PetroBakken expects to satisfy ongoing working capital requirements with funds flow from operations,
cash and available credit.
Petrominerales – 66% owned by Petrobank
Petrominerales’ first quarter capital program was funded internally from operating cash flows. The
remainder of the 2010 capital program is expected to be funded through a combination of existing cash
balances, operating cash flows, and prudent use of credit facilities. At March 31, 2010, Petrominerales
had cash and cash equivalents of US$13.9 million and an undrawn US$150 million borrowing base.
Petrominerales believes it is well positioned financially with significant available credit capacity, assets
that are providing strong production growth and operating netbacks along with an extensive inventory
of exploration prospects.
Petrominerales has a revolving credit facility with a US$150 million borrowing base that is undrawn. The
borrowing base is reviewed with the lender semi-annually. Petrominerales also has US$81.7 million of
convertible debentures outstanding that mature on December 6, 2010. The debentures are convertible
into common shares of Petrominerales at the option of the holder at a conversion price of $27.3485 per
share. If the convertible debentures are not converted to equity before maturity, Petrominerales has an
option to force conversion of the debentures at the prevailing conversion price should the price of
Petrominerales’ common shares exceed 130 percent of the prevailing conversion price of the
debentures for 20 trading days within a period of 30 consecutive trading days. Provided that
Petrominerales’ share price remains at or higher than the conversion price at the debenture maturity
date, it is likely that the debentures will be converted into common shares. Petrominerales also has a
number of alternatives to repay the debentures on maturity that include, but are not limited to, issuing
additional debt, using the revolving credit facility, issuing equity or using potential cash on hand to be
generated from operations. Petrominerales also maintains local Colombian operating lines of credit of
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 28
US$30.1 million that are primarily used to issue letters of credit to support exploration contracts. At
March 31, 2010, letters of credit issued against the Colombian operating lines of credit totalled
US$18.0 million.
Petrominerales is in compliance with the covenants contained in its credit facility and convertible
debenture agreements. The credit facility contains financial covenants to maintain a ratio of bank debt
to trailing twelve month earnings before interest, tax, depletion, depreciation and amortization under
3.0 times and to maintain a current ratio greater than 1.0 times (current assets divided by current
liabilities less unused bank debt and the liability portion of convertible debentures). The convertible
debentures have financial covenants to maintain a ratio of book value of equity to total assets of at least
30 percent and to limit the amount of security and encumbrances to 27.5 percent of Petrominerales’
total assets.
Petrominerales’ assets provide significant funds flow from operations and are the largest source of
liquidity. Petrominerales has a history of generating positive funds flow from operations.
Outstanding Share Data
The number of Petrobank shares outstanding at the date of this MD&A is 105,978,640, an increase of
4,139,704 shares from March 31, 2010, 3,920,446 of which were issued upon early conversion of
Petrobank's 5.125% convertible debentures, 179,009 of which were issued upon early conversion of
Petrobank’s 3% convertible debentures, 34,749 of which were issued upon the exercise of stock options,
and 5,500 of which were issued upon the exercise of deferred common shares.
Risks and Uncertainties
There have been no significant changes in the three months ended March 31, 2010 to the risks and
uncertainties identified in the MD&A for the year ended December 31, 2009.
Sensitivities
The Company's earnings and cash flow are sensitive to changes in crude oil and natural gas prices,
exchange rates and interest rates.
The following factors demonstrate the expected impact on annualized before tax cash flow for 2010:
Change of: (millions)
PetroBakken
Crude oil US$1.00/bbl WTI reference price (assuming 37,500 bopd) $8.5
1,000 bopd of production @ US$75/bbl WTI $21.1
Natural gas $1.00/mcf AECO reference price (assuming 33 mmcf per day) $8.6
10 mmcf per day of production @ $5.00/mcf AECO $15.8
Currency US$0.01 in exchange rate $9.3
Interest rate 1% change in interest rate $2.3
Petrominerales
Crude oil US$1.00/bbl WTI reference price (assuming 45,000 bopd) $11.2
1,000 bopd of production @ US$75/bbl WTI $20.1
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 29
Critical Accounting Policies and Estimates
There have been no changes to the Company’s critical accounting policies and estimates in the three
months ended March 31, 2010.
Changes in Accounting Policies
International Financial Reporting Standards
In February 2008, the CICA’s Accounting Standards Board confirmed the convergence of Canadian GAAP
with International Financial Reporting Standards (“IFRS”) will be required for interim and annual
financial statements effective for fiscal years beginning on or after January 1, 2011, including
comparatives for 2010 and an opening balance sheet at January 1, 2010 showing the changes from
Canadian GAAP to IFRS.
IFRS uses a conceptual framework similar to Canadian GAAP, however IFRS prescribes certain
differences for recognition, measurement and disclosure principles which are outlined below under
“Potential Impacts of IFRS Adoption”.
Petrobank commenced its IFRS Conversion Project in late 2008 by completing an initial scoping phase,
and has established a project plan and project team, which includes key finance staff, management,
external advisors and the audit committee.
IFRS Conversion Project Plan
The project plan consists of three phases as identified below:
IFRS Conversion Project Phase Progress
Phase 1 – Initial Scoping
• Identification of key differences between Canadian
GAAP and IFRS, and high-level changes required in
accounting policies, systems and processes.
Completed
Phase 2 – Detailed Assessment and Design
• Comprehensive documentation and analysis
of changes in accounting standards, policies,
processes and procedures, which expands on
scoping from Phase 1.
In progress; IFRS Team has
completed a preliminary
review of certain high
impact standards
Phase 3 – Implementation
• Implementation and execution of changes
identified and prioritized from Phase 2.
In progress in 2010
Potential Impacts of IFRS Adoption
Significant differences that have been identified between Canadian GAAP and IFRS that will impact
Petrobank are: accounting for capital assets, including exploration costs, depletion and depreciation,
impairment testing, capitalized interest, asset retirement obligations, share-based payments and an
increased level of disclosure requirements. These differences have been identified based on the current
IFRS standards issued and expected to be in effect on the date of transition. Certain IFRS standards may
be modified, and as a result, the impact may be different than Petrobank’s current expectations. The
project team is currently determining the financial statement impact of these standards. The impact on
the consolidated financial statements is not reasonably determinable at this time.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 30
First Time Adoption of IFRS (“IFRS 1”)
The transition to IFRS requires the Company to apply IFRS 1, which prescribes requirements for
preparing IFRS-compliant financial statements in the first reporting period after the changeover date
(January 1, 2010). IFRS 1 includes a requirement for retrospective application of each IFRS as if they
were always in effect. IFRS 1 also mandates certain exemptions for retrospective application and
provides optional exemptions from retrospective application to ease the transition to IFRS in the
transition year.
In July 2009, the International Accounting Standards Board approved amendments and released
additional exemptions to IFRS 1 “Additional Exemptions for First-time Adopters” which prescribes
transitional exemptions for oil and gas companies following full cost accounting. The amendment allows
an entity that used full cost accounting under its previous GAAP to elect, at its time of adoption, to
measure exploration and evaluation assets at the amount determined under the entity's previous GAAP
and to measure oil and natural gas assets in the development or production phases by allocating the
amount determined under the entity's previous GAAP for those assets, to the underlying assets pro rata
using reserve volumes or reserve values as of the date of transition, subject to an impairment test as
prescribed under IFRS. This exemption will allow Petrobank to apply IFRS to its full cost pools on a
prospective basis, from date of transition to IFRS.
Impairment of Assets (“IAS 36”)
IAS 36 uses the concept of cash generating units to accumulate asset carrying costs to test and measure
impairment. Under IFRS, Petrobank will no longer be permitted to test for asset impairment at the cost
center level (country level) as permitted under the Canadian GAAP full cost guideline. IFRS will require
impairment testing to be performed at the cash generating unit level, which is lower than the current
cost center level.
In addition, IAS 36 uses a one-step approach for testing and measuring asset impairments, with asset
carrying values being compared to the higher of: value-in-use and fair value less costs to sell. Value in
use is defined as the amount equal to the present value of future cash flows expected to be derived
from the asset. In the absence of an active market, fair value less costs to sell may also be determined
using discounted cash flows. The use of discounted cash flows under IFRS to test and measure asset
impairment differs from Canadian GAAP, which uses undiscounted cash flows to test and measure
impairment. This may result in more frequent write-downs in the carrying amounts of assets under IFRS
because the asset carrying amounts previously supported under Canadian GAAP were based on
undiscounted cash flows.
However, under IAS 36, impairment losses that were previously recognized may be reversed where
circumstances change such that the impairment is reduced. This differs from Canadian GAAP, which
prohibits the reversal of previously recognized impairment losses.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 31
Exploration and Evaluation Expenditures (“IFRS 6”)
Oil and gas companies are required to account for exploration and evaluation expenditures in
accordance with IFRS 6, which permits a number of accounting policy choices. For example, this
standard addresses the recognition, measurement, presentation and disclosure requirements for costs
incurred in the exploration phase. Unlike Canadian GAAP, IFRS requires the identification and
presentation of exploration and evaluation expenditures to be separated from developed and producing
assets. In addition, Petrobank will be required to perform an impairment test on exploration and
evaluation expenditures when there is a determination that the expenditures have resulted in a
technically feasible and commercially viable project. At that time, the expenditures would be tested for
impairment, and then transferred to the developed and producing assets category. Petrobank is
currently evaluating its policy options and applicable impact of these policies under IFRS.
Property Plant and Equipment (“IAS 16”)
IFRS and Canadian GAAP contain the same basic principles of accounting for property, plant and
equipment; however, differences in application do exist, specifically for oil and gas companies. IAS 16
requires costs recognized as property plant and equipment to be allocated to the significant parts of the
asset and amortize each significant component separately. This is a departure from Canadian GAAP for
full cost oil and gas companies, and may increase the number of components that will be amortized
separately, and could impact the amount of amortization expense.
Under IAS 16, companies have the choice to account for property, plant and equipment under the cost
model, or the revaluation model. It is expected that Petrobank will choose and apply the cost model to
account for its property, plant and equipment after transition to IFRS.
Borrowing Costs (“IAS 23”)
IFRS requires the capitalization of borrowing costs that are associated with the construction and
development of certain assets. Under Canadian GAAP, Petrobank only capitalizes borrowing costs in
relation to our heavy oil projects that are considered to be in the pre-operating phase, and expenses the
remainder. Analysis of this standard is currently underway to determine a methodology and quantify the
amount of borrowing costs that will be capitalized under IFRS. Under IFRS certain borrowing costs may
be capitalized to the balance sheet and not expensed as currently reported by Petrobank.
Decommissioning Costs (“IAS 37”)
Under IFRS, the recognition criteria for contingent liabilities are much more explicit than Canadian GAAP
and may potentially require the booking of additional liabilities associated with the asset retirement
obligations of Petrobank’s oil and gas assets than under Canadian GAAP. Liabilities for decommissioning
and restoration are recognized for both legal and constructive obligations. At a reporting period when
there is a change in the current market discount rate IFRS requires retroactive adjustment to the
estimated liability, whereas under Canadian GAAP all adjustments are made on a prospective basis.
Changes in the estimated timing of cash flows necessary to discharge the obligation are added to or
deducted from the cost of the related asset and the adjusted amounts are amortized prospectively over
the estimated useful life of the asset.
In addition, the unwinding of the discount arising from the passage of time is recognized as a financing
cost and not a part of depletion expense as is currently presented in Petrobank’s financial statements
under Canadian GAAP.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 32
Internal Controls over Financial Reporting and Disclosure
As part of Petrobank’s certification of internal controls process, as required under Canadian Securities
Administrators’ National Instrument 52-109, all entity level, information technology, disclosure and
business process controls will be reviewed, updated as necessary and tested to reflect changes arising
from Petrobank’s conversion to IFRS. Material changes identified will be mapped and tested to ensure
that no material deficiencies exist as a result of the conversion to IFRS.
Information Systems
It is expected that the conversion to IFRS will have an impact on the information system requirements.
Petrobank has initiated a plan to map IFRS accounting and reporting requirements to changes required
in the accounting system which will be implemented and tested during 2010.
Regulatory Policies
Certification of Disclosures in Interim Filings
In accordance with Multilateral Instrument 52-109 of the Canadian Securities Administrators, the
Company quarterly issues a “Certification of Interim Filings” (“Certification”). The Certification requires
certifying officers to state that they are responsible for establishing and maintaining disclosure controls
and procedures (“DC&P”) and internal control over financial reporting (“ICFR”).
The Certification requires certifying officers to state that they designed DC&P, or caused it to be
designed under their supervision, to provide reasonable assurance that: (i) material information relating
to Petrobank is made known to the certifying officers by others; (ii) information required to be disclosed
by Petrobank in reports filed with, or submitted to, securities regulatory authorities is recorded,
processed, summarized and reported within the time periods specified under Canadian securities
legislation. In addition, the Certification requires certifying officers to state that they have designed
ICFR, or caused it to be designed under their supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes.
During the quarter ended March 31, 2010, there has been no change in the Company’s ICFR that has
materially affected, or is reasonably likely to materially affect, the Company’s ICFR. The Company has
continually had in place systems relating to DC&P and ICFR and will continue to monitor such
procedures as the Company’s business evolves.
Outlook
In addition to the plans discussed in this MD&A, please see the Company’s first quarter 2010 Operational
Update and the 2009 Annual Report.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 33
CONSOLIDATED BALANCE SHEETS (Thousands of Canadian dollars)
As at March 31, 2010 Dec. 31, 2009
Assets
Current assets
Cash and cash equivalents $ 47,477 $ 135,515
Restricted cash 1,396 1,439
Accounts receivable and other current assets 354,113 223,770
Risk management assets (Note 10) 4,825 -
Future income tax assets 2,490 782
410,301 361,506
Other assets 26,320 27,859
Capital assets 4,741,276 4,316,222
Risk management assets (Note 10) 2,587 -
Goodwill (Note 3) 1,313,875 1,060,981
Total assets $ 6,494,359 $ 5,766,568
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities $ 549,212 $ 481,916
Convertible debentures (Note 6) 79,291 80,409
Risk management liabilities (Note 10) 9,040 2,694
Future income tax liabilities 1,329 -
638,872 565,019
Bank debt (Note 5) 336,322 748,185
Convertible debentures (Note 6) 688,765 348,957
Other long-term liabilities 3,713 3,961
Asset retirement obligations 72,387 69,122
Risk management liabilities (Note 10) 1,205 3,442
Future income tax liabilities 538,109 482,570
Total liabilities 2,279,373 2,221,256
Commitments and contingencies (Note 12)
Shareholders’ equity
Petrobank shareholders’ equity
Common shares (Note 4) 1,193,510 880,183
Convertible debentures (Note 6) 29,489 76,811
Contributed surplus (Note 4) 33,770 33,436
Paid-in capital (Note 4) 916,784 875,924
Accumulated other comprehensive loss (Note 4) (46,771) (29,894)
Retained earnings 495,817 455,344
Total Petrobank shareholders’ equity 2,622,599 2,291,804
Non-controlling interests (Note 8) 1,592,387 1,253,508
Total shareholders’ equity 4,214,986 3,545,312
Total liabilities and shareholders’ equity $ 6,494,359 $ 5,766,568
Subsequent events (Notes 5, 6, 10 and 13)
See accompanying notes to these consolidated financial statements.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 34
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Thousands of Canadian dollars, except per share amounts)
Three months ended March 31, 2010 2009
Revenues
Oil and natural gas $ 533,133 $ 190,786
Royalties (63,113) (19,441)
Gain on risk management contracts (Note 10) 1,432 2,227
Interest income 56 129
471,508 173,701
Expenses
Production 53,476 27,796
Transportation 27,525 16,469
General and administrative 14,401 7,359
Acquisition related (Note 3) 68 -
Stock-based compensation 11,109 7,676
Interest (Note 7) 20,079 9,169
Foreign exchange loss (gain) (12,239) 3,484
Depletion, depreciation and accretion 195,168 108,745
309,587 180,698
Income (loss) before taxes 161,921 (6,997)
Current taxes 29,722 1,477
Future income tax expense (recovery) 8,852 (9,353)
Net income 123,347 879
Less: Net income attributable to non-controlling
interests (Note 8) 40,848 2,421
Net income (loss) attributable to Petrobank shareholders 82,499 (1,542)
Retained earnings, beginning of period 455,344 334,410
Conversion of convertible debentures, net of tax (Note 6) (42,026) -
Retained earnings, end of period $ 495,817 $ 332,868
Basic earnings per share (Note 4) $ 0.82 $ (0.02)
Diluted earnings per share (Note 4) $ 0.76 $ (0.02)
See accompanying notes to these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Thousands of Canadian dollars)
Three months ended March 31, 2010 2009
Net income (loss) attributable to Petrobank shareholders $ 82,499 $ (1,542)
Other comprehensive income:
Unrealized gain (loss) on translation of Petrominerales’
financial statements (Note 4) (16,877) 13,757
Unrealized loss on interest rate contracts - (185)
Comprehensive income attributable to Petrobank
shareholders $ 65,622 $ 12,030
See accompanying notes to these consolidated financial statements.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 35
CONSOLIDATED STATEMENTS OF CASH FLOW (Thousands of Canadian dollars)
Three months ended March 31, 2010 2009
Operating Activities
Net income (loss) attributable to Petrobank shareholders $ 82,499 $ (1,542)
Depletion, depreciation and accretion 195,168 108,745
Unrealized (gain) loss on risk management contracts (2,451) 8,328
Unrealized foreign exchange (gain) loss (29,712) 4,092
Stock-based compensation 11,109 7,676
Accretion on convertible debentures 7,339 4,835
Realized foreign exchange loss related to financing (Note 6) 18,184 -
Net income attributable to non-controlling interests 40,848 2,421
Future income tax expense (recovery) 8,852 (9,353)
Amortization of deferred financing costs and other assets 2,824 258
Asset retirement obligations settled (706) (304)
333,954 125,156
Changes in non-cash working capital (Note 11) (116,286) (13,892)
217,668 111,264
Financing Activities
Repayment of bank debt (503,833) (658)
Early conversion of convertible debentures –
including costs (Note 6) (1,364) -
Issuance of convertible debentures – net of costs 769,651 -
Realized loss on foreign exchange contract (Note 6) (18,184) -
Equity issued (repurchased) by Petrominerales – net of costs 1,981 (7,902)
Financing costs relating to bank debt - (234)
Dividends paid or declared by PetroBakken (41,687) -
Issuance of common shares – net of costs (Note 4) 8,351 185
Amortization of obligations under gas sale contract (204) (204)
Changes in non-cash working capital (Note 11) (1,952) -
212,759 (8,813)
Investing Activities
Expenditures on capital assets (325,259) (172,994)
Expenditures on other assets (1,045) (4,147)
Acquisitions (Note 3) (341,519) -
Proceeds from dispositions (Note 3) 106,032 -
Dividends received or receivable from PetroBakken 26,352 -
Sale of interest in subsidiary - 4,097
Changes in restricted cash 43 1,469
Changes in non-cash working capital (Note 11) 17,994 6,438
(517,402) (165,137)
Effect of exchange rate changes on cash and cash equivalents (1,063) 1,367
Net change in cash and cash equivalents (88,038) (61,319) Cash and cash equivalents, beginning of period 135,515 102,181
Cash and cash equivalents, end of period $ 47,477 $ 40,862
Cash and cash equivalents consist of:
Cash $ 13,453 $ 8,631
Cash equivalents $ 34,024 $ 32,231
See accompanying notes to these consolidated financial statements.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the three months ended March 31, 2010 and 2009
(Unaudited, all tabular amounts are expressed in thousands of Canadian dollars, except share amounts or as
otherwise noted)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements for Petrobank Energy and Resources Ltd. (“Petrobank” or
the “Company”) as at and for the three months ended March 31, 2010 should be read in conjunction
with the audited consolidated financial statements as at and for the year ended December 31, 2009. The
notes to these interim consolidated financial statements do not conform in all respects to the note
disclosure requirements of generally accepted accounting policies (“GAAP”) for annual consolidated
financial statements. These interim consolidated financial statements are prepared using the same
accounting policies and methods of computation as disclosed in the annual consolidated financial
statements as at and for the year ended December 31, 2009. The disclosures provided within are
incremental to those included with the annual financial statements.
NOTE 2 – CHANGES IN ACCOUNTING POLICIES
Pending Accounting Pronouncements
The Accounting Standards Board has confirmed the convergence of Canadian GAAP with International
Financial Reporting Standards (“IFRS”) will be effective January 1, 2011. The Company has developed a
project plan in order to ensure successful implementation within the required timeframe. The impact on
the Company’s consolidated financial statements is not reasonably determinable at this time. Key
information will be disclosed as it becomes available during the transition period.
NOTE 3 – ACQUISITIONS AND DISPOSITIONS
Rondo Petroleum Inc.
On March 12, 2010, PetroBakken Energy Ltd. (“PetroBakken” or “PBN”) acquired all of the issued and
outstanding shares of Rondo Petroleum Inc. (“Rondo”) for $277.2 million, including Rondo bank debt
and working capital deficiency assumed. Rondo was a private company with the majority of its
production from properties in the Cardium formation. The consolidated statement of operations
includes the results of operations for the period following the closing of the transaction on
March 12, 2010.
This transaction has been accounted for using the purchase method whereby the assets acquired and
the liabilities assumed are recorded at fair values. The following table summarizes the net assets
acquired pursuant to the acquisition:
Net assets acquired Amount
Capital assets $ 205,677
Working capital deficiency (22,214)
Bank debt (net of cash acquired) (16,033)
Asset retirement obligations (1,967)
Goodwill 107,195
Future income tax liability (33,690)
Total net assets acquired $ 238,968
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 37
Consideration paid Amount
Cash $ 88,702
PetroBakken common shares issued (5,524,471) 150,266
Total purchase price $ 238,968
The above amounts are estimates, which were made by management at the time of the preparation of
these interim financial statements based on information then available. Amendments may be made to
these amounts as values subject to estimate are finalized.
Berens Energy Ltd.
On February 25, 2010, PetroBakken acquired all of the issued and outstanding shares of Berens Energy
Ltd. (“Berens”) for $344.4 million, including Berens bank debt and working capital deficiency assumed.
Berens was a publicly traded company with the majority of its production from properties in the
Cardium formation in west central Alberta. The consolidated statement of operations includes the
results of operations for the period following the closing of the transaction on February 25, 2010.
This transaction has been accounted for using the purchase method whereby the assets acquired and
the liabilities assumed are recorded at fair values. The following table summarizes the net assets
acquired pursuant to the acquisition:
Net assets acquired Amount
Capital assets $ 216,946
Working capital deficiency (16,660)
Bank debt (net of cash acquired) (74,873)
Asset retirement obligations (3,351)
Fair value of financial instruments 852
Goodwill 145,699
Future income tax liability (15,796)
Total net assets acquired $ 252,817
Consideration paid Amount
Cash $ 252,817
Total purchase price $ 252,817
The above amounts are estimates, which were made by management at the time of the preparation of
these interim financial statements based on information then available. Amendments may be made to
these amounts as values subject to estimate are finalized.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 38
TriStar Oil & Gas Ltd.
On October 1, 2009, PetroBakken acquired all of the issued and outstanding shares of TriStar Oil & Gas
Ltd. (“TriStar”) for a total cost of $2.8 billion, including TriStar bank debt and working capital deficiency
assumed. TriStar was a publicly traded company with the majority of its production from the light oil
properties in southeast Saskatchewan.
This transaction has been accounted for using the purchase method whereby the assets acquired and
the liabilities assumed are recorded at fair values. The following table summarizes the net assets
acquired pursuant to the acquisition:
Net assets acquired Amount
Capital assets $ 2,165,577
Working capital deficiency (83,625)
Bank debt (net of cash acquired) (351,551)
Asset retirement obligations (47,277)
Fair value of financial instruments 2,901
Goodwill 997,810
Future income tax liability (294,447)
Total net assets acquired $ 2,389,388
Consideration paid Amount
Cash $ 584,455
PetroBakken common shares issued (61,762,500) 1,804,933
Total purchase price $ 2,389,388
The above amounts are estimates, which were made by management at the time of the preparation of
these financial statements based on information then available. Amendments may be made to these
amounts as values subject to estimate are finalized.
Asset Divestitures
In February and March 2010, PetroBakken closed three divestitures representing approximately
3,000 barrels of oil equivalent (“boepd”) of production (55% natural gas) in Alberta for total net
proceeds of $106.0 million.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 39
NOTE 4 – SHARE CAPITAL
As at March 31, 2010, Petrobank had 101,838,936 common shares, 3,379,387 stock options and
226,129 deferred common shares outstanding. An additional 4,099,455 shares were issued subsequent
to March 31, 2010 on the conversion of Petrobank's remaining convertible debentures (Note 6).
Common Shares
Common Share Continuity Number Amount
Balance at December 31, 2009 93,616,958 $ 880,183
Issued upon conversion of debentures (Note 6) 7,452,099 307,143
Costs associated with conversion of debentures - (7,117)
Tax effect of share issue costs - 1,874
Exercise of stock options 769,879 8,510
Transfer from contributed surplus related to stock
options and deferred common shares exercised
-
2,917
Balance at March 31, 2010 101,838,936 $ 1,193,510
Contributed Surplus
Changes in Contributed Surplus Amount
Balance at December 31, 2009 $ 33,436
Stock-based compensation 3,251
Transfer from contributed surplus related to stock options and deferred
common shares exercised
(2,917)
Balance at March 31, 2010 $ 33,770
Paid-in Capital
Changes in Paid-in Capital Amount
Balance at December 31, 2009 $ 875,924
Changes of ownership interest in PetroBakken 34,551
Changes of ownership interest in Petrominerales 6,309
Balance at March 31, 2010 $ 916,784
Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) Amount
Balance at December 31, 2009 $ (29,894)
Unrealized loss on translation of Petrominerales’ financial statements (16,877)
Balance at March 31, 2010 $ (46,771)
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 40
Stock Options
Stock Option Continuity
Stock
Options
Weighted-
Average
Exercise Price
Balance at December 31, 2009 4,091,079 $ 28.34
Granted 152,125 54.70
Exercised (769,879) 11.05
Forfeited (93,938) 28.25
Balance at March 31, 2010 3,379,387 $ 33.47
Deferred Common Shares
Deferred Common Share Continuity Number
Balance at December 31, 2009 204,310
Granted 21,819
Balance at March 31, 2010 226,129
Stock-Based Compensation
The fair value of Petrobank stock options and deferred common shares granted have been estimated on
their respective grant dates using the Black-Scholes option-pricing model using the following
assumptions:
Three months ended March 31, 2010 2009
Risk free interest rate 2.25% 1.75%
Dividend rate 0% 0%
Expected life – options (years) 2 – 4 3.75 – 4
Expected life – deferred common shares (years) 8 8
Expected volatility 33% 47.5%
Fair value of stock options granted $ 15.48 $ 8.44
Fair value of deferred common shares granted $ 53.89 $ 22.31
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 41
Earnings Per Share
The following tables summarize the net income attributable to Petrobank shareholders and weighted
average number of common shares used in calculating basic and diluted earnings per share.
Three months ended March 31, 2010 2009
Net income (loss) attributable to Petrobank shareholders
adjustments
Basic $ 82,499 $ (1,542)
Interest expense on Petrobank’s convertible debentures 1,583 -
Tax effect (443) -
Impact of Petrominerales dilution on net income (3,186) -
Impact of PetroBakken dilution on net income (62) -
Diluted $ 80,391 $ (1,542)
Weighted average common share adjustments
Basic 100,241,380 83,531,853
Effect of convertible debentures 5,123,804 -
Effect of stock options 820,909 -
Effect of deferred common shares 214,823 -
Diluted 106,400,916 83,531,853
NOTE 5 – BANK DEBT
As at March 31, 2010 HBU and Corporate
PetroBakken
Petrominerales
Petrobank
Consolidated
Bank debt outstanding $ - $ 342,800 $ - $ 342,800
Deferred financing costs - (6,478) - (6,478)
Bank debt $ - $ 336,322 $ - $ 336,322
Heavy Oil Business Unit (“HBU”) and Corporate
Petrobank’s HBU and Corporate operating segment closed a $30 million secured credit facility on
April 14, 2010. The reserve-based revolving credit facility has an initial term ending April 30, 2011,
extendable by the lender for an additional year. If the lender were to not extend the term, the drawn
amount would become due on April 30, 2012. The credit facility bears interest at the prime rate plus a
margin based upon the collateral value of Petrobank’s ownership in its public subsidiaries. The facility is
secured by a $100 million demand debenture and a securities pledge in respect of the issued and
outstanding shares of Petrobank’s publicly traded subsidiaries. While drawn, the HBU and Corporate
operating segment must maintain a coverage ratio of not less than 2:1.
PetroBakken Energy Ltd. (“PetroBakken” or “PBN”)
PetroBakken’s reserve-based revolving credit facility has a borrowing limit of $900 million.
Petrominerales Ltd. (“Petrominerales” or “PMG”)
Petrominerales has a US$150 million secured credit facility. Petrominerales also has lines of credit
available in Colombia totalling US$30.1 million. At March 31, 2010, Petrominerales had letters of credit
totalling US$18.0 million and pledged US$1.4 million in restricted cash to guarantee the obligations
under these exploration contracts. Letters of credit issued against the Colombian operating line of
credit (US$18.0 million) reduce the amounts available under the facility.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 42
NOTE 6 – CONVERTIBLE DEBENTURES
Petrobank
5.125% Convertible Debentures
In January 2010, debentures with a face value of US$250.7 million were converted into a total of
7,452,099 common shares and $300.0 million (net of costs) was credited to share capital. Petrobank
paid $1.4 million to debenture holders and issued 868,988 more shares than per the original debenture
agreement in order to early convert their holdings into common shares. As a result, the Company
recorded a $42.0 million, net of tax, reduction in retained earnings relating to the early conversion.
In April 2010, the remaining US$149.3 million principal amount of Petrobank's 5.125% convertible
debentures were converted into a total of 3,920,446 common shares.
3.0% Convertible Debentures
As at March 31, 2010, the principal balance of the 3.0% debentures was US$5.1 million. In May 2010,
Petrobank forced conversion of the remaining 3.0% debentures, upon which 179,009 common shares
were issued.
PetroBakken
On January 25, 2010, PetroBakken issued US$750 million of convertible debentures maturing in
February 2016. The debentures are convertible into common shares of PetroBakken and have an annual
coupon rate of 3.125% and a conversion price of US$39.61 per debenture. Upon conversion, a total of
18,934,612 PetroBakken common shares may be issued.
The debentures have been classified as a liability net of the fair value of the conversion feature which
has been classified as non-controlling interests. The US$750 million issuance resulted in $577 million
being classified as a liability and $194 million being classified as non-controlling interests. The liability
portion will accrete up to the principal balance at maturity. The accretion and the interest paid are
expensed as interest expense in the consolidated statement of operations.
The U.S. dollar denominated convertible debentures are translated for accounting purposes based on
the Canadian dollar exchange rate on the date of issue. PetroBakken entered into currency swap
agreements prior to the date of issue and the actual Canadian dollar proceeds received by PetroBakken
resulted in an $18.2 million realized foreign exchange loss in the three months ended March 31, 2010.
Petrominerales
As at March 31, 2010, the principal balance of the debentures is US$81.7 million. If converted, a total of
2,987,367 Petrominerales common shares may be issued, subject to normal provisions for adjustments
of the conversion price such as a special distribution to shareholders or upon a change of control.
Petrominerales has an option to force conversion of the debentures at the prevailing conversion price
should the price of Petrominerales’ common shares exceed 130% of the prevailing conversion price of
the debentures for 20 trading days within a period of 30 consecutive trading days.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 43
The following table summarizes the liability component of the debentures at March 31, 2010:
PBG PBN PMG Total
Balance of liability component,
December 31, 2009 $ 348,957 $ - $ 80,409 $ 429,366
Liability component of debenture issuance (1) - 577,153 - 577,153
Accretion 1,270 4,774 1,294 7,338
Conversion into common shares (2) (211,840) - - (211,840)
Changes in exchange rates (8,197) (23,352) (2,412) (33,961)
Balance of liability component,
March 31, 2010 $ 130,190 $ 558,575 $ 79,291 $ 768,056
(1) The fair value of the equity component on the date of issuance is reflected as non-controlling interests on the
consolidated balance sheet. (2)
The conversion value of $211.8 million represents the carrying amount of the liability portion on the
conversion date.
NOTE 7 – INTEREST EXPENSE
Interest expense includes the following:
Three months ended March 31, 2010 2009
Cash interest $ 13,516 $ 6,731
Accretion on Petrobank convertible debentures 1,270 3,606
Accretion on PetroBakken convertible debentures 4,774 -
Accretion on Petrominerales convertible debentures 1,294 1,310
Amortization of deferred financing costs 1,424 258
Capitalized interest related to Conklin project (1) (2,199) (2,736)
Interest expense $ 20,079 $ 9,169
(1) Capitalized interest includes $2.2 million of cash and $nil of non-cash accretion (2009 – $2.6 million and
$0.1 million, respectively).
NOTE 8 – NON-CONTROLLING INTERESTS
The components of the Company’s non-controlling interests in PetroBakken, Petrobank’s 62% owned
subsidiary as at March 31, 2010 (reduced to 58% subsequent thereto – see Note 13), and
Petrominerales, Petrobank’s 66% owned subsidiary are as follows:
PetroBakken Petrominerales Total
Balance at December 31, 2009 $ 1,069,805 $ 183,703 $ 1,253,508
Attributable income 14,535 26,313 40,848
Stock-based compensation 5,236 2,622 7,858
Issuance of convertible debentures 194,113 - 194,113
Changes in ownership interest (1) 115,715 (4,320) 111,395
Dividends paid or declared by PetroBakken (41,687) - (41,687)
Dividends received or receivable by
Petrobank
26,352
-
26,352
Balance at March 31, 2010 $ 1,384,069 $ 208,318 $ 1,592,387
(1) Reflects the book values of the non-controlling interest share related to shares issued in connection with
PetroBakken’s acquisition of Rondo and changes in non-controlling interest due to Petrominerales stock
options exercised in the period.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 44
NOTE 9 – CAPITAL MANAGEMENT
The Company’s policy is to maintain a strong capital base in order to provide flexibility in the future
development of the business and maintain investor, creditor and market confidence. Petrobank,
PetroBakken and Petrominerales manage their capital structure independently and generate their own
cash flows, and have the ability to fund their operations through the issuance of secured and unsecured
debt as well as equity financing. The table below outlines the composition of Petrobank’s consolidated
capital structure:
HBU and Corporate
PetroBakken
Petrominerales
Petrobank
Consolidated
Working capital deficit
(surplus) – excluding
convertible debentures $ (28,438) $ 222,845 $ (45,127) $ 149,280
Bank debt – principal $ - $ 342,800 $ - $ 342,800
Convertible debentures –
principal amount (US$) $ 154,400(1) $ 750,000 $ 81,700 $ 986,100
Common share capital (2) $1,193,510 $ 2,867,364 US$ 200,104 $ 1,193,510
Credit facility
– borrowing base $ 30,000 $ 900,000 US$ 150,000
Available credit capacity $ 30,000 $ 557,200 US$ 150,000
(1) In April and May 2010, all of the remaining Petrobank convertible debentures were converted into a total of
4,099,455 common shares (Note 6). As a result, the outstanding principal amount of Petrobank convertible
debentures has been reduced to nil. (2)
The common share capital of PetroBakken and Petrominerales eliminates upon consolidation of these
financial statements.
Petrobank’s and each of our public subsidiary’s policies are to maintain a strong capital base in order to
provide flexibility in the future development of the business and maintain investor, creditor and market
confidence.
HBU and Corporate
The Company manages its capital structure and makes adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets. The Company considers its capital
structure to include common share capital, convertible debentures, bank debt and working capital. In
order to maintain or adjust the capital structure, from time to time the Company may issue common
shares or other securities, obtain project financing on, sell assets or adjust capital spending to manage
current and projected debt levels.
Based on Petrobank’s current ownership and PetroBakken’s payment of an annual dividend of $0.96 per
common share, Petrobank expects to receive $105 million of dividends annually from PetroBakken paid
monthly. Petrobank can also raise funds by selling a portion of its ownership in PetroBakken and
Petrominerales or by issuing additional debt secured by these interests.
Petrobank is in compliance with the covenants on its convertible debenture. Petrobank’s convertible
debenture agreements stipulate they each maintain a ratio of equity to total assets of at least 30% and
to limit the amount of security and encumbrances it has on its total assets to 27.5%.
The Petrobank legal entity has not paid or declared any dividends since the date of incorporation.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 45
PetroBakken
PetroBakken considers its capital structure to include its common share capital, bank debt outstanding,
convertible debentures and working capital.
PetroBakken monitors leverage and adjusts its capital structure based on the ratio of bank debt to
annualized earnings before interest, taxes and non-cash items (a non-GAAP measure). At
March 31, 2010, the ratio of debt to annualized first quarter 2010 earnings before interest, taxes and
non-cash items was 0.4 to 1, which is within a range acceptable to management. PetroBakken uses the
ratio of debt to annualized earnings before interest, taxes and non-cash items as a key indicator of the
Company’s leverage and to monitor the strength of the balance sheet. In order to facilitate the
management of this ratio, the Company prepares annual budgets, which are updated as necessary
depending on varying factors including current and forecast commodity prices, changes in capital
structure, execution of the Company’s business plan and general industry conditions. The annual budget
is approved by the PetroBakken Board of Directors and updates are prepared and reviewed as required.
The Company is in compliance with the covenants on its credit facility agreements. The Company is not
subject to restrictive financial covenants under its credit facility.
PetroBakken’s convertible debentures are considered to be equity as opposed to debt for capital
management purposes. The Company has the option to repay the principal and interest amount in
common shares or cash.
PetroBakken is in compliance with the covenants on its convertible debentures. The convertible
debenture agreement stipulates that the ratio of secured debt to total assets is not to exceed 35%.
The Company had positive cash flow from operations and a credit facility with $557 million of available
capacity as at March 31, 2010.
Since October 1, 2009, PetroBakken has paid and declared monthly dividends of $0.08 per share.
Petrominerales
Petrominerales monitors leverage and adjusts its capital structure based on the ratio of net debt to
annualized cash flow. This ratio is calculated as net debt, a non-GAAP measure Petrominerales defines
as outstanding bank debt plus the principal amount of convertible debentures and working capital,
divided by cash flow from operations before changes in non-cash working capital for the most recent
calendar quarter, annualized. At March 31, 2010, net debt was negative since Petrominerales had a
working capital surplus and the convertible debentures were considered equity since the market price of
Petrominerales shares was greater than the conversion price. Petrominerales uses the ratio of net debt
to cash flow as a key indicator of Petrominerales’ leverage and to monitor the strength of the balance
sheet. In order to facilitate the management of this ratio, Petrominerales prepares annual budgets,
which are updated as necessary depending on varying factors including current and forecast crude oil
prices, changes in capital structure, execution of Petrominerales’ business plan and general industry
conditions. The annual budget is approved by the Board of Directors and updates are prepared and
reviewed as required.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 46
Petrominerales is in compliance with the covenants contained in its convertible debenture and credit
facility agreements. The Credit facility has financial covenants to maintain a ratio of bank debt to trailing
twelve month earnings before interest, tax, depletion, depreciation and amortization under 3.0 times
and to maintain a current ratio greater than 1.0 times (current assets divided by current liabilities less
unused bank debt and the liability portion of convertible debentures). The convertible debentures have
financial covenants to maintain a ratio of equity to total assets of at least 30% and to limit the amount of
security and encumbrances Petrominerales has on its total assets to 27.5% of total assets.
Petrominerales has not paid or declared any dividends since the date of incorporation.
NOTE 10 – FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Company has exposure to the following risks from its use of financial instruments: credit risk,
liquidity risk and market risk. This note presents information about the Company's exposure to each of
these risks and the Company's objectives, policies and processes for measuring and managing risk.
Further quantitative disclosures are included throughout these consolidated financial statements.
The Board of Directors has overall responsibility for the establishment and oversight of the Company's
financial risk management framework and monitors risk management activities. The Company identifies
and analyzes the risks faced by the Company and may utilize financial instruments to mitigate these
risks.
Credit Risk
A substantial portion of the Company’s accounts receivable are with customers and joint-venture
participants in the oil and natural gas industry and are subject to normal industry credit risks. The
carrying amount of accounts receivable reflects management’s assessment of the credit risk associated
with these customers and participants. At March 31, 2010, oil, natural gas and NGL production of the
Company’s Canadian oil production is sold to a number of oil and gas marketers. The Company’s policy
to mitigate the risk associated with these balances is to establish marketing relationships with large
purchasers and, where practical, obtain support in the form of guarantees or letters of credit.
Petrominerales’ crude oil production is sold, as determined by market based prices adjusted for quality
differentials, to four main counterparties: Ecopetrol, the Colombian national oil company, and the
remainder to three international oil companies. Petrominerales’ oil revenue is received in Bermuda and
is denominated in U.S. dollars. Typically, Petrominerales’ maximum credit exposure to customers is up
to two months’ sales revenue except for the production month of December where November sales and
part of December sales from the main oil purchaser are received by the end of the year. Petrominerales
does not anticipate non-performance by any of the counterparties. In addition, Petrominerales reduced
its credit risk to certain counterparties in 2010 through credit insurance.
The composition of the Company’s accounts receivable are as follows:
As at March 31, 2010 Dec. 31, 2009
Oil and natural gas customers $ 318,706 $ 177,476
Tax receivable - 8,856
Other 19,125 18,118
Total $ 337,831 $ 204,450
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 47
Receivables from oil and natural gas marketers are normally collected 25 to 45 days after the month of
production. The Company’s policy to mitigate credit risk associated with these balances is to establish
marketing relationships with large purchasers and, where practical, obtain support in the form of
guarantees or letters of credit. Receivables from joint-venture partners related to capital and operating
expenses are generally collected between 45 and 90 days after the month of billing. The Company
historically has not experienced any collection issues with its oil and natural gas customers or joint
interest partners.
Cash and cash equivalents and restricted cash consist of cash bank balances and short term deposits
maturing in less than 90 days. The Company manages the credit exposure related to short term
investments by selecting counter parties based on credit ratings and monitors all investments to ensure
a stable return, avoiding investment vehicles with higher risk such as asset backed commercial paper.
The carrying amount of accounts receivable, cash and cash equivalents and restricted cash represent the
Company’s maximum credit exposure. The Company had a $1.9 million allowance for doubtful accounts
as at March 31, 2010 (December 31, 2009 – $1.8 million). For the three months ended March 31, 2010
and 2009, the Company did not provide for any doubtful accounts nor was it required to write-off any
receivables.
The Company’s accounts receivables are aged as follows:
As at March 31, 2010 Dec. 31, 2009
Not past due $ 326,905 $ 196,450
Past due 10,926 8,000
Total $ 337,831 $ 204,450
Liquidity Risk
The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and unusual conditions without incurring
unacceptable losses or jeopardizing the Company’s business objectives.
The Company prepares annual capital expenditure budgets, which are monitored and updated as
considered necessary. Production is monitored regularly to provide current cash flow estimates and the
Company utilizes authorizations for expenditures on projects to manage capital expenditures. To
facilitate the capital expenditure program, the Company has revolving asset based credit facilities, as
outlined in Note 5, that are reviewed semi-annually by the lenders.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 48
The following are the contractual maturities of financial liabilities at March 31, 2010:
Financial Liability < 1 Year 1-3 Years 3-5 Years Thereafter Total
Accounts payable and accrued
liabilities
$ 549,212
$ -
$ -
$ -
$ 549,212
PetroBakken bank debt – principal - 342,800 - - 342,800
Petrobank convertible debentures
– principal (US$) (1)
-
5,100
-
149,300
154,400
PetroBakken convertible debentures
– principal (US$) (2)
-
-
-
750,000
750,000
Petrominerales convertible
debentures – principal (US$) (3)
81,700
-
-
-
81,700
Total (4) $ 632,187 $ 347,979 $ - $ 913,329 $ 1,893,495
(1) The US$5.1 million and US$149.3 million of debentures are convertible to common shares of Petrobank at a
conversion price of US$28.4902 per share, and US$38.08 per share, respectively. Subsequent to
March 31, 2010, the US$154.4 million of outstanding debentures were converted into common shares
(Note 13). (2)
The debentures are convertible to common shares of PetroBakken at a conversion price of US$39.61 per
PetroBakken share. Upon conversion, 18,934,612 PetroBakken common shares may be issued. (3)
The debentures are convertible to common shares of Petrominerales at a conversion price of US$27.3485 per
Petrominerales share. Upon conversion, 2,987,367 Petrominerales common shares may be issued. At
maturity, Petrominerales will redeem the principal amount in cash if the debentures have not been converted. (4)
US$ amounts have been converted using a period end exchange rate of 1.0156.
Market Risk
Market risk is the risk that changes in market factors, such as foreign exchange rates, commodity prices,
and interest rates will affect the Company's cash flows, net income, liquidity or the value of financial
instruments. The objective of market risk management is to mitigate market risk exposures where
considered appropriate and maximize returns.
The Company may utilize derivative instruments to manage market risk. The Board of Directors
periodically reviews the results of all risk management activities and all outstanding positions.
Foreign Currency Risk
The Company is exposed to foreign currency fluctuations as Colombian revenues are denominated in
U.S. dollars and Colombian expenses are denominated primarily in U.S. dollars and Colombian pesos.
The Company is also exposed as Petrobank’s and PetroBakken’s convertible debentures are
denominated in U.S. dollars and Canadian revenues are strongly linked to U.S. dollar denominated
benchmark prices. When appropriate, the Company may enter into agreements to fix the exchange rate
of Canadian dollars to U.S. dollars in order to manage exchange rate risks. The Company had no forward
exchange rate contracts in place as at March 31, 2010.
At March 31, 2010, if the Canadian dollar had depreciated five percent against the U.S. dollar with all
other variables held constant, net income would have been $29.5 million lower for the year ended
March 31, 2010 (2009 – $10.4 million lower), due to Petrobank and PetroBakken’s U.S. dollar
denominated convertible debentures and PetroBakken’s U.S. dollar denominated risk management
contracts. Other comprehensive income would have been $0.5 million lower (2009 – $14.4 million
higher) due to the foreign currency balances of Petrominerales that are translated into Petrobank’s
consolidated financial statements. The Company had no forward exchange rate contracts in place as at
or during the three months ended March 31, 2010.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 49
Commodity Price Risk
Changes in commodity prices may significantly impact the results of the Company’s operations and cash
generated from operating activities, and can also impact the Company’s borrowing base under its
secured credit facilities. Lower commodity prices can also reduce the Company’s ability to raise capital.
Crude oil prices are impacted by world economic and political events that dictate the levels of supply
and demand. Natural gas prices in Canada are influenced primarily by North American supply and
demand. From time to time the Company may attempt to mitigate commodity price risk through the use
of financial derivatives. The Company’s policy is to only enter into commodity contracts considered
appropriate to a maximum of 50% of forecasted production volumes.
PetroBakken had the following crude oil price risk management contracts outstanding at
March 31, 2010:
Term Volume (bopd) Price ($/bbl) Benchmark
Jan. 1, 2010 – Dec. 31, 2010 500 C$65.00 floor / C$87.25 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$65.00 floor / C$90.00 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$65.00 floor / C$99.50 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$70.00 floor / C$87.85 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$82.45 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$93.65 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$94.15 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 1,000 C$75.00 floor / C$98.30 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 C$75.00 floor / C$100.00 ceiling C$ WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$93.05 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$93.25 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$94.75 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$70.00 put US$WTI
Jan. 1, 2010 – Dec. 31, 2010 500 US$75.00 put US$WTI
Feb. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$97.00 ceiling US$WTI
Feb. 1, 2010 – Dec. 31, 2010 500 US$75.00 floor / US$97.25 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 1,000 C$75.00 floor / C$90.00 ceiling C$ WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$93.75 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$95.00 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$99.00 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$80.00 floor / US$98.55 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$80.00 floor / US$98.60 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$104.00 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$104.25 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 C$80.00 floor / C$95.60 ceiling C$WTI
Jan. 1, 2011 – Dec. 31, 2011 1,000 C$80.00 floor / C$100.70 ceiling C$WTI
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 50
PetroBakken entered into the following crude oil price risk management contracts subsequent to
March 31, 2010:
Term Volume (bopd) Price ($/bbl) Benchmark
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$108.70 ceiling US$WTI
Jan. 1, 2011 – Dec. 31, 2011 500 US$75.00 floor / US$111.00 ceiling US$WTI
PetroBakken had the following natural gas price risk management contracts outstanding at
March 31, 2010:
Term Volume (GJ/d) Price ($/GJ) Benchmark
Nov. 1, 2009 – Oct. 31, 2010 1,500 C$5.00 floor / C$6.25 ceiling AECO
Nov. 1, 2009 – Nov. 30, 2010 2,500 C$5.00 floor / C$7.20 ceiling AECO
Apr. 1, 2010 – Mar. 31, 2011 2,000 C$6.00 fixed price swap AECO
Apr. 1, 2010 – Dec. 31, 2011 2,000 C$6.02 fixed price swap AECO
PetroBakken assumed the following natural gas price risk management contract upon the acquisition of
Result Energy Inc. (“Result”) on April 1, 2010:
Term Volume (GJ/d) Price ($/GJ) Benchmark
Nov. 1, 2009 – Oct. 31, 2010 1,200 C$ 5.36 fixed price swap AECO
The fair value of the commodity risk management contract liability at March 31, 2010 is $3.3 million
(December 31, 2009 – $6.0 million liability). If crude oil prices had been 10% lower on March 31, 2010,
with all other variables held constant, the change in the fair value of the risk management contracts
would have resulted in net income that was $24.9 million higher for the three months then ended
(2009 – $2.6 million higher). If natural gas prices had been 10% lower on March 31, 2010, with all other
variables held constant, the change in the fair value of the risk management contracts would have
resulted in net income that was $0.9 million higher for the three months then ended (2009 – $nil).
Long-Term Physical Gas Sale Contract
PetroBakken is committed to deliver 2,209 GJ per day of natural gas under an escalating price contract
which expires October 31, 2012. The wellhead price under this contract for the three months ended
March 31, 2010 was $5.35 per GJ. PetroBakken applies the expected purchase and sale exemption to
this contract and accordingly does not apply hedge accounting principles to this contract.
Interest Rate Risk
The Company is exposed to interest rate cash flow risk on floating interest rate bank debt due to
fluctuations in market interest rates. The remainder of the Company’s financial assets and liabilities are
not exposed to interest rate risk.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 51
PetroBakken had the following interest rate swap contracts in place at March 31, 2010:
Term Notional Principal / Month Fixed Annual Rate (%)
Apr. 2009 – Apr. 2011 C$50 million 1.050%
Apr. 2009 – Apr. 2012 C$50 million 1.300%
Jan. 2009 – Jan. 2012 C$50 million 1.620%
Jan. 2009 – Jan. 2012 C$50 million 1.653%
Feb. 2009 – Feb. 2012 C$25 million 1.540%
Feb. 2009 – Feb. 2012 C$25 million 1.510%
Feb. 2009 – Feb. 2011 C$40 million 2.390%
Jun. 2009 – Jun. 2012 C$25 million 2.094%
The fair value of the interest rate swap contracts as at March 31, 2010 was an asset of $0.5 million
(December 31, 2009 – $0.1 million liability). If interest rates had been 1% higher at March 31, 2010, net
income would have increased by $4.8 million due to the change in fair value of the interest rate swaps
(2009 – $2.1 million higher).
Three months ended March 31, 2010 2009
Realized gain (loss) on risk management contracts $ (1,019) $ 10,555
Unrealized gain (loss) on risk management contracts 2,451 (8,328)
Gain on risk management contracts $ 1,432 $ 2,227
The unrealized gain (loss) represents the change in fair value of the underlying risk management
contracts to be settled in the future. The realized gain (loss) represents the risk management contracts
settled during the period.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 52
Fair Value of Financial Instruments
The Company’s financial instruments are classified as cash and cash equivalents, restricted cash,
accounts receivable, accounts payable and accrued liabilities, risk management liabilities, bank debt,
convertible debentures and obligations under gas sale contract included within other long-term
liabilities on the balance sheet. The carrying value and fair value of these financial instruments at
March 31, 2010 is disclosed below by financial instrument category, as well as any related gain, loss,
expense or revenue for the three months ended March 31, 2010:
Financial Instrument
Carrying
Value
Fair Value
Gain
Interest
Expense
Revenue
Assets Held For Trading
Cash and cash equivalents (1) 47,477 47,477 - - -
Restricted cash 1,396 1,396 - - -
Loans and Receivables
Accounts receivable 337,831 337,831 - - -
Other Liabilities
Accounts payable and
accrued liabilities
549,212
549,212
-
-
-
Risk management liabilities
(net)
2,833 2,833 1,432(2) - -
Bank debt 336,322 342,800 - 5,631(3) -
Convertible debentures 768,056 1,089,021(4) 31,549(5) 12,757(6) -
Obligations under gas sale
contract
2,139
304
-
-
204(7)
(1) The effective yield on cash equivalents at March 31, 2010 was 0.2% (December 31, 2009 – 0.3%).
(2) Included in gain on risk management contracts on the statement of operations and retained earnings, and statement of
comprehensive income. The unrealized gain of $2.5 million representing the change in fair value of the contracts is
included on the statement of cash flow. (3)
Included in interest expense net of capitalized interest on the statement of operations and retained earnings and
statement of comprehensive income. The amortization of deferred financing costs is included on the statement of cash
flow. The effective yield on bank debt before capitalized interest at March 31, 2010 was 3.2% (December 31, 2009 – 3.6%). (4)
The Company estimated the fair value of the convertible debentures based on market transactions close to
March 31, 2010. The principal amounts of the Petrobank, PetroBakken and Petrominerales convertible debentures at
March 31, 2010 are US$154.4 million, US$750 million and US$81.7 million, respectively. (5)
Included in foreign exchange loss (gain) on the statement of operations and retained earnings, and statement of cash flow.
In addition, a $2.4 million gain relating to the foreign currency translation of the liability component of Petrominerales’
convertible debentures is also included on the statement of comprehensive income. (6)
Included in interest expense net of capitalized interest on the statement of operations and retained earnings and
statement of comprehensive income. The non-cash interest expense relating to the accretion of the initial discounts and
transaction costs that are netted against the liabilities are included in accretion on convertible debentures on the
statement of cash flow. The effective yields on the convertible debentures issued by Petrobank are 9.2% and 9.4% for the
respective 5.125% (US$149.3 million face value) and 3% (US$5.1 million face value), 9.0% on the convertible debentures
issued by PetroBakken, and 9.7% on the convertible debentures issued by Petrominerales. (7)
Included in oil and natural gas revenues on the statement of operations and retained earnings and statement of
comprehensive income. The amortization of obligations under gas sale contract is included on the statement of cash flow.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 53
The Company classifies the fair value of these financial instruments according to the following hierarchy
based on the amount of observable inputs used to value the instrument.
• Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the
reporting date. Active markets are those in which transactions occur in sufficient frequency and
volume to provide pricing information on an ongoing basis.
• Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in
Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are
based on inputs, including quoted forward prices for commodities, time value and volatility factors,
which can be substantially observed or corroborated in the marketplace.
• Level 3 – Valuations in this level are those with inputs for the asset or liability that are not based on
observable market data.
The Company’s financial instruments have been assessed on the fair value hierarchy described above.
Assessment of the significance of a particular input to the fair value measurement requires judgement
and may affect the placement within the fair value hierarchy level.
The risk management contracts (level 2) are recorded at their fair value based on quoted market prices
in the futures market on the balance sheet date; accordingly, there is no difference between fair value
and carrying value. Bank debt (level 1) is recorded on the balance sheet net of deferred financing costs
which results in a difference between carrying value and the fair value. The fair value of the convertible
debentures (level 2) is estimated based on market transactions close to the balance sheet date, while
the carrying value only represents the liability component of the debentures. The fair value of the
obligations under the gas sale contract (level 2) is based on the estimated cash payment necessary to
settle the contract at the balance sheet date. Cash payments are calculated based on discounted cash
flow analysis using prevailing market prices at the time. Due to the short term nature of: cash and cash
equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities their
carrying values approximate their fair values.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 54
NOTE 11 – CHANGES IN NON-CASH WORKING CAPITAL
Three months ended March 31, 2010 2009
Change in:
Accounts receivable and other current assets $ (130,343) $ (38,557)
Accounts payable and accrued liabilities 67,296 30,231
Depletion related to other current assets 1,721 872
Other assets (44) -
(61,370) (7,454)
Working capital deficiencies acquired (Note 3) (38,874) -
$ (100,244) $ (7,454)
Changes relating to:
Attributable to operating activities $ (116,286) $ (13,892)
Attributable to financing activities $ (1,952) $ -
Attributable to investing activities $ 17,994 $ 6,438
Other cash flow information:
Cash taxes paid $ - $ -
Cash interest paid $ 11,083 $ 3,369
Cash interest received $ 4 $ 101
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The following is a summary of the estimated costs required to fulfill the Company's remaining contractual
commitments at March 31, 2010:
Type of Commitment < 1 Year 1-3 Years 3-5 Years Thereafter Total
HBU and Corporate
Office operating leases ($) 1,800 4,300 5,100 10,900 22,100
PetroBakken
Office operating leases ($) 4,704 9,058 11,126 19,345 44,233
Petrominerales
Exploration contracts (US$) (1)
33,900 27,200 - - 61,100
Transportation contract (US$) (2)
8,054 35,685 11,895 - 55,634
Office lease (US$) 1,800 3,800 3,800 - 9,400
Total Company (3)
50,941 81,083 32,166 30,245 194,435
(1) These work commitments are normal course of business exploration activities that include property costs,
acquisition and processing of seismic data and drilling exploration wells. Petrominerales has issued letters of
credit totalling US$18.0 million and pledged US$1.4 million in restricted cash to guarantee the obligations
under these exploration contracts. (2)
Petrominerales entered into a take-or-pay transportation contract to deliver up to 10,000 barrels of oil per day
in the Llanos Basin of Colombia. (3)
US$ amounts have been converted using the March 31, 2010 exchange rate of $1.0156.
The development of certain of the Company’s assets and the success of its operations are dependent on
obtaining sufficient financing to fund its working capital requirements and future capital expenditure
commitments. The Company plans to fund these commitments with existing cash balances, funds flow
from operations, available credit facilities, new debt and potentially through the issuance of equity.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 55
In the normal course of operations, the Company and its subsidiaries have disputes with industry
participants for which the Company currently cannot determine the ultimate result. The Company and
its subsidiaries records costs as they are incurred or become determinable. Management believes the
resolution of these matters would not have a material adverse effect on the Company’s consolidated
financial position or results from operations.
NOTE 13 – SUBSEQUENT EVENTS
Petrobank
On April 23, 2010, the remaining US$149.3 million principal amount of Petrobank's 5.125% convertible
debentures were early converted. An aggregate of US$27.4 million was paid and 3,920,446 common
shares were issued (Note 6). On May 10, 2010, the remaining US$5.1 million principal amount of
Petrobank's 3% convertible debentures were converted into 179,009 common shares (Note 6), as
Petrobank was able to force conversion as Petrobank's trading price exceeded 120% of conversion price
for at least 20 trading days within a 30-day trading period. As a result of these two events, there are no
longer any Petrobank convertible debentures outstanding.
PetroBakken
On April 1, 2010, PetroBakken acquired all of the issued and outstanding shares of Result Energy Inc.
(“Result”) for cash consideration of $200 million and the issuance of 11.2 million PetroBakken common
shares. Result had working capital of approximately $60 million on closing.
Petrominerales
On April 14, 2010, Petrominerales acquired all of the issued and outstanding shares of PanAndean
Resources plc for US$30.4 million. The assets acquired pursuant to the acquisition include 6.9 million
gross (3.9 million net) acres from four exploration blocks in Peru and one exploration block in Colombia.
Petrobank Energy and Resources Ltd. First Quarter 2010 Results 56
NOTE 14 – SEGMENTED INFORMATION
Three months ended March 31, 2010 2009
PBN
PMG
HBU and
Corporate
Total
PBN
PMG
HBU and
Corporate
Total
Revenues
Oil and natural gas $ 275,706 $ 257,427 $ - $ 533,133 $ 95,486 $ 95,300 $ - $ 190,786
Royalties (37,541) (25,572) - (63,113) (10,571) (8,870) - (19,441)
Gain on risk management
contracts 1,432
-
-
1,432 2,227
-
-
2,227
Interest income - 37 19 56 - 99 30 129
239,597 231,892 19 471,508 87,142 86,529 30 173,701
Expenses
Production 30,242 23,234 - 53,476 13,536 14,260 - 27,796
Transportation 2,600 24,925 - 27,525 2,451 14,018 - 16,469
General and administrative 7,518 5,240 1,643 14,401 3,000 3,419 940 7,359
Acquisition related 68 - - 68 - - - -
Stock-based compensation 5,236 2,622 3,251 11,109 4,765 1,422 1,489 7,676
Interest 14,902 3,591 1,586 20,079 3,016 2,960 3,193 9,169
Foreign exchange loss (gain) (7,271) 4,472 (9,440) (12,239) - (3,510) 6,994 3,484
Depletion, depreciation
and accretion
133,925
61,050
193
195,168
58,810
49,851
84
108,745
187,220 125,134 (2,767) 309,587 85,578 82,420 12,700 180,698
Income (loss) before taxes 52,377
106,758
2,786
161,921 1,564
4,109
(12,670)
(6,997)
Current taxes - 29,722 - 29,722 - 1,477 - 1,477
Future income taxes
(recovery) 13,276
(262)
(4,162)
8,852 1,385
(7,671)
(3,067)
(9,353)
Net income 39,101
77,298
6,948
123,347 179
10,303
(9,603)
879
Income applicable to non-
controlling interests
14,535
26,313
-
40,848
-
2,421
-
2,421
Net income (loss) attributable
to Petrobank shareholders $ 24,566
$ 50,985
$ 6,948
$ 82,499 $ 179
$ 7,882
$ (9,603)
$ (1,542)
Identifiable assets $ 5,084,280 $ 861,168 $ 548,911 $ 6,494,359 $ 1,309,251 $ 721,574 $ 383,321 $ 2,414,146
Goodwill $ 1,285,756 $ - $ 28,119 $ 1,313,875 $ 35,052 $ - $ 28,119 $ 63,171
Capital expenditures $ 185,116 $ 116,209 $ 23,934 $ 325,259 $ 70,024 $ 81,560 $ 21,410 $ 172,994
Dividends paid or declared
(received or receivable)
$ 41,687
$ -
$ (26,352)
$ 15,335
$ -
$ -
$ -
$ -
Suite 1900, 111 – 5th Avenue S.W., Calgary, Alberta, T2P 3Y6
Phone: 403.750.4400 Fax: 403.266.5794 E-mail: [email protected] - Website: www.petrobank.com
TSX: PBG
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